Pivotal Price Action Over The Next Week
After two days of heavy selling, energy prices are trying to bounce to start Friday’s session. A break in the risk-off selling seems to be at hand as U.S. equity futures are also pointing higher this morning after a rough week. The price action over the next week looks like it could be pivotal long term as refined product futures are testing the bullish trend lines on their weekly charts, and a break lower will make today’s rally look like a dead cat bounce with another 20 cents of downside to come, while a hold above current levels leaves the door open to testing new highs for the year in June.
More reports that Iran was close to an agreement to lift sanctions (which IF true could bring another 500,000-2 million barrels/day of oil back onto the world market within the year) earned some of the credit for the latest wave of selling Thursday. That announcement was not confirmed by U.S. officials however, and coincidentally came around the same time that a ceasefire in Gaza was announced, which so far has put a stop to the rockets Iran helped build from being fired into Israel.
Hurricane season doesn’t officially start for another week, but already there are two potential storm systems being tracked. The first near Bermuda (which would be named Ana) is unlikely to threaten the U.S., but the second in the Gulf of Mexico could briefly reach tropical storm strength and bring more heavy rain and wind to the Gulf Coast that’s been battered by storms all week, causing several refinery units to be knocked offline.
NOAA is predicting another above-average year for storm activity in the Atlantic basin, with 13-20 named storms, 3-5 of which could be major hurricanes. Given the recent increase in storm activity, the agency is also increasing the “average” number of storms in a year from 12 to 14. That’s not as many as the record setting season we saw last year, but of course it only takes one to cause a major supply disruption since half of the country’s refining capacity sits on the gulf coast, and the region is more vulnerable now due to the saturation that’s occurred this week.
RIN prices joined the selloff in fuel and grain prices Thursday, with reports that the EPA was planning to hold renewable obligations for 2021 and 2022 unchanged due to the COVID-inspired drop in total fuel demand adding to the negative sentiment. As the chart below shows however, the nickel drop in prices this week barely registers on the chart after a 60 cent rally in the past month, and buyers still seem eager to step in whenever there’s a dip.
Who is running the show? On the same day the president made an executive order instructing government agencies to review climate change impacts, a partisan feud between FERC commissioners is leaving pipeline project approvals in the lurch. The FERC situation is eerily similar to the strange reaction by the FTC commissioner last week, when they tried to claim the Speedway sale might be illegal, after it had already gone through.
A new bill proposed in congress Thursday would create a blenders tax credit of $1.50-$2/gallon for sustainable aviation fuel (SAF). The bill is widely supported by the industry, with over 60 organizations showing support for the bill. One interesting note on the bill is that it specifically excludes fuels made from palm fatty acids, which have become a highly controversial “renewable” fuel since they arguably do more harm to the environment than traditional fuels, which is an argument the ethanol lobby will not enjoy if it spreads to other programs as well.
Click here to download a PDF of today's TACenergy Market Talk.
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The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.
Week 15 - US DOE Inventory Recap
Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
Click here to download a PDF of today's TACenergy Market Talk.