Pullback In Prices After Euphoric Monday Gains
Energy prices are moving higher for a second day, but are trading below where they were this time yesterday when the runaway vaccine rally was in full force. The pullback in prices Monday afternoon seemed to follow the lead of U.S. equity markets that gave back most of their euphoric gains from early Monday morning, as the reality of logistics and timing with the new vaccine started to set in. The high water marks from the early run up set the near-term resistance layers that will determine if we see a strong November rally in prices, or just a return to the sideways shuffle that’s been going on since June.
Physical gasoline markets were less enthusiastic Monday, with basis values across most U.S. spot markets sliding and offsetting some of the big gains in RBOB futures. The reality seems to be that the seasonal demand slowdown is already upon us, and any pickup in demand from a vaccine isn’t likely to start until next year.
Physical diesel markets on the other hand continued to see stronger basis values that sent cash prices in most markets to their highest levels since August, while West Coast values reached their highest levels since March. Midwestern basis continues to strengthen – Group 3 prompt bases values reached their highest levels in more than a year – as the end of a strong harvest season has helped inventories decline rapidly.
Tropical Storm Eta is back over open water in the Gulf of Mexico after lashing south Florida with heavy rain over the weekend. The latest forecasts have it heading towards the Florida Panhandle this weekend, but AL, MS an Eastern LA are still in the forecast cone, which brings several refineries into its potential path. The good news is that even though this storm could again reach hurricane strength over open water this week, it’s expected to lose strength as it approaches land for the fourth time in its long and winding path. With winds dropping into the 35 mph range there should be minimal damage, but heavy rains and power outages will still be a concern.
Tropical Storm Theta set the all-time record for named storms in a single season at 29 when it formed in the open Atlantic overnight. That storm is heading east towards Portugal and will not threaten the U.S.
Meanwhile, another tropical wave is given 70% odds of developing into the 30th named storm of the year over the next five days. As we have seen already this year with hurricanes Delta, Zeta and Eta, the warm Caribbean waters can spark rapid development once these storm systems get organized.
RIN values continue to rally, with both D4 and D6 values pulling near three-year highs as the expected administration change looks more friendly to renewables than refiners. Specifically it’s expected that the new EPA administers are less likely to push small refiner exemptions, meaning more demand for RINs (assuming those small refiners aren’t forced to close their doors).
The latest in the rapidly changed refinery landscape: Shell announced more capacity reductions at its facilities in Singapore. Delek laid off workers and is deferring maintenance work at its Krotz Spring plant to 2021, and BP announced a new hydrogen project at the Lingen refinery in Germany. That project aims to produce hydrogen from water using electrolysis, and replace some of the natural gas based hydrogen that’s produced at the plant currently.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
Click here to download a PDF of today's TACenergy Market Talk