Production Cuts From Saudi Arabia And Russia Are Getting Much Of The Credit For The Continued Rally In Oil Prices

Market TalkFriday, Sep 15 2023
Pivotal Week For Price Action

Refined product prices are sliding to start Friday’s session after reaching new multi-month highs Thursday, while oil prices are clinging to modest gains near their highest prices of the year.      

Self-fulfilling prophecy: Production cuts from Saudi Arabia and Russia are getting much of the credit for the continued rally in oil prices, even though increased exports from Iran and other OPEC members are reducing the impact of those reductions. Perhaps more importantly, the announced production cuts seem to be encouraging money managers that had sat on the sidelines of the energy market for most of last year to jump back in, which seems to be a major contributor in the recent run-up in prices. We’ll get another look at the weekly CFTC commitments of traders report later this afternoon to confirm (or dispel) that theory.

Basis values are becoming noteworthy again with California gasoline values going through another September surge following 2 more reported refinery hiccups Thursday, which makes supplies of the dwindling 6lb RVP gasoline become even more scarce. LA spot values jumped to a $1.20/gallon premium to futures yesterday, which is both impressive and still half of the premium we saw this time last year. 

On the diesel side, there’s a huge difference for ULSD on the west coast vs the Chicago market this morning, with values in California going for 55-65 cents over futures, while Chicago-land ULSD is trading near a 50 cent/gallon discount.

RIN prices continue to come under pressure, with D4 (Bio/RD) values reaching an 18-month low in the mid $1.20s Thursday, while D6 (ethanol) values are following along, essentially pegged to the D4s given that the D4s can be used in place of D6 RINs for compliance purposes. 

Hurricane Lee made another favorable small shift to the east in its forecast path, moving the center of the storm further away from the coast of New England, and Irving’s refinery in St. John NB. It’s worth noting that the European models still have this storm hitting very close to the refinery, while the GFS (US) model hits Nova Scotia, and the difference between the two is likely to be meaningful in terms of the potential disruption to that facility. The storm also seems to be moving ahead faster than previous estimates, which should help vessel traffic resume operations almost 12 hours faster than it appeared just a day ago. That’s the good news. The bad news is that Nigel is about to be named and is on a very similar path to Lee, meaning suppliers along the east coast will still have to contend with shipping delays and the terminal allocations or runouts that come with them for at least another week.

Can’t catch a break: The beleaguered refinery in Texas City, which is the 4th largest in the US, and was renamed “Galveston Bay” several years ago in an effort to rebrand the plants image after numerous deadly fires, reported yet another upset yesterday, this time in a hydro treating unit that was caused by a loss of power. The facility is still trying to recover from another fire that hit an FCC unit a week ago, and to finish repairs from a deadly fire in May.  

Meanwhile, China’s refinery output reached a record high in August as the new capacity that’s been built in recent years comes online just in time to take advantage of the robust diesel market. 

Mexico’s energy minister told local media that the new Dos Bocas refinery that’s been years late and several billion dollars short will be producing at full capacity (around 340mb/day) by the end of the year. IF that facility comes online fully, it will displace a large amount of imports from the US, which is the stated goal of Mexico’s President. Place your bets.  

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Market Talk Update 09.15.2023

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Pivotal Week For Price Action
Market TalkFriday, Sep 22 2023

Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday

Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.  

The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news. 

There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.

The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.   

Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.

Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours.  It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much. 

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, Sep 21 2023

The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week

The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today. 

The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.

IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year

US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule.  Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.

Chicken or the egg?  Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands.  Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.

Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check.  The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior.   The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.

As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, Sep 20 2023

Week 38- US DOE Inventory Recap