Stimulus Package Encourages Buying Across Asset Classes
Gasoline futures are trying to lead the energy market on another rally this morning, approaching two year highs and pulling the rest of the complex towards healthy gains. Crude oil and diesel prices are both moving higher on the day, but are still a couple percentage points away from reaching fresh highs of their own. The broader market has a risk-on feel as the $1.9 Trillion stimulus package seems to be encouraging buying across asset classes.
The DOE’s weekly status report Wednesday showed that refiners still have a long way to go to resume output levels to what we saw before February’s polar plunge, while crude oil producers have already returned to “normal” production levels. Refined product inventories remain tight across much of the country as the restarts continue to drag on, and demand picks back up. Diesel demand estimates in particular stood out last week, with the DOE estimating consumption at the top end of the five year range, which makes you wonder how strong it will get later this year once more businesses resume normal activity levels.
Michael Regan was approved by the Senate to lead the EPA Wednesday, a vote that garnered bipartisan support with a 66-34 vote. While Regan hails from a state that’s relatively neutral in the Big Ag vs. Big Oil battle known as the Renewable Fuel Standard, the market is sending clear signals that they expect the new administration to favor biofuels over fossil fuels. Regan set his priorities for the agency during the hearing:
Our priorities for the environment are clear: we will restore the role of science and transparency at EPA. We will support the dedicated and talented career officials. We will move with a sense of urgency on climate change, and we will stand up for environmental justice and equity,"
While it’s hard to argue that expectations for the new EPA to be tougher on refiners has contributed to the spike in RIN prices this year, there are also fundamental factors at play.
A surge in gasoline imports (that requires buying of RINs) and ethanol exports (that requires RINs be retired) both seem to be bullish factors in the recent D6 RIN run-up. For bio RINs, the surge in Soybean & Soybean oil prices to eight year highs points to the challenges producers will face in the coming years to find adequate feedstocks to produce their fuel.
While nothing seems to be slowing the RIN rally at the moment, it’s worth mentioning with the administrator highlighting the role of science as a priority that the National Wildlife Federation has challenged the legality of the RFS. The NWF argument provides evidence of severe environmental harm caused by excessive fertilizing, water usage and pollution caused by incentivizing farmers to turn marginal crop & wetlands into soybeans and corn that can be turned into fuel. That waiver petition is joined with the petitions of severe economic harm issues by refiners that will soon be argued in front of the Supreme Court.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
Click here to download a PDF of today's TACenergy Market Talk
Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.