Refined Products Continue To Push Higher
Refined products continue to push higher this morning, reaching new pre-COVID highs as the country deals with perhaps the largest single refinery disruption event in history. Roughly 1/3 of all U.S. refining capacity has been disrupted to some degree, with most of the plants in the list below being forced to shut units or cut back run rates by a brutal combination of pipe-bursting cold and a lack of steady power, with more storms hitting large parts of the country today.
When all is said and done, it appears this event will have impacted more U.S. refineries than any other single event, but the price reaction remains relatively minor compared to storms like Katrina (2005) or Ike (2008) for a variety of reasons, most notably that the plants are largely expected to begin restarting in the next 24 - 48 hours with minimal long term damage. For comparison, in the wake of Katrina and Ike, we saw some spot markets trade up by $1 -$2/gallon, and this time around (so far anyway) we’re still talking about 10 - 20 cent increases. We’re also already working in a reduced demand environment, and we’ve seen consumption plummet further so far this week, which should help limit the disruption coming from the supply side of the equation.
In addition to the rally in futures, most cash markets are seeing stronger basis values as buyers try to find available barrels to replace those that are lost. The buying is unusually widespread from coast to coast, to coast as the country’s refining hub is temporarily crippled. Supplemental barrels for some Southwest markets will have to come from California, East Coast markets will lean more heavily on resupply from Europe, and the Midwest may just have to fend for itself for a while, which usually isn’t too hard to do this time of year.
Colonial pipeline continues to operate, but some shipments appear to be delayed as the availability of product and power to push it up the line are both suspect in the lines largest origin points. So far we’re still talking about tight allocations in the markets fed by that line, not complete terminal outages, which would be likely if its main lines are forced to close. Explorer pipeline was forced to delay restart of its main line that runs from Houston, through DFW, to several Midwestern markets due to the latest round of ice & snow.
It’s not just physical lines that are being impacted by this event, with so much of the industry headquartered in Houston, the power outages in that city are creating headaches across the country on a transactional level as some servers that drive business operations are struggling, as are the employees who rely on them.
The weekly DOE inventory report is delayed due to the President’s Day holiday, and will be largely ignored anyway as the data was compiled before the polar plunge dramatically changed the refining landscape.
Today’s interesting non-weather-related read: The case of the missing Oil.
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.