Supply Fears Are Dwindling As Temperatures Rise Across The Country
It’s another soft start for energy markets to start Thursday’s session, as supply fears are dwindling as temperatures rise across the country. Mid-day price reversals have become the theme of the year so far however, don’t be surprised to see another rally later in the day as the energy complex struggles to find a new price trend.
More refinery upsets were reported Wednesday along the Gulf Coast, but basis values actually dipped on the day, suggesting the dozens of hiccups reported this week aren’t amounting to much lost production. See the attached spreadsheet of all filings to Texas regulators to get a feel for the various challenges faced by the energy industry this week.
While Gulf Coast refiners work to return to normal operations Mid Continent facilities look like they can’t wait for drivers to get back on the road. Prompt basis values in the Group and Chicago markets are trading around 30 cent discounts to futures for gasoline and 40 cent discounts for diesel, putting their values 20-30 cents lower than their neighbors on the Gulf Coast. This phenomenon has brought a return of an old seasonal pattern where markets in North Texas, Arkansas and Tennessee fed by Gulf Coast facilities see buyers disappear as trucks long haul barrels from neighboring markets.
While there is another cold snap forecast to start tomorrow, it looks like the Gulf Coast refining zone will only dip down to freezing temps for a few hours, so it’s unlikely we’ll have another round of upsets like we experienced earlier this week.
Talking their own books? Continuing a recent trend, the IEA sounded much more bearish than OPEC in its Monthly Oil Market outlook, predicting oil demand will increase by just 1.2 million barrels/day in 2024, compared to an increase of 2.2 million barrels/day predicted yesterday by the cartel. The IEA is also predicting more non-OPEC supply growth next year (1.5 million barrels/day vs 1.3 for OPEC’s forecast) which they think will keep a lid on prices despite the growing tensions in the Middle East.
Markets continue to shrug off new attacks in the Red Sea, with oil prices ticking lower despite a 3rd ship this week being hit by a drone, which brought about more retaliatory strikes from the US. While the violence has caused many ships to take the long way to Europe, and caused freight rates to rise, the impact of physical supplies of oil, refined products and LNG supplies all appear to be minimal at this point.
Iran vs the world? As if the proxy battles via Hamas, Hezbollah and the Houthi’s, or the attacks on tankers near the Strait of Hormuz weren’t enough, Iran appears to now be at war with Pakistan. While this latest escalation certainly doesn’t help soothe the frayed nerves in the region, it could actually end up being bearish for oil prices as it becomes clear that Iran is going alone in its various meddling and does not (so far) have the support of neighboring Arab nations that control more of the world’s petroleum production.
The API reported more inventory builds last week, with gasoline stocks up 4.8 million barrels, diesel up 5.2 million barrels while crude oil inventories had a small increase of around ½ million barrels. The DOE’s weekly report is due out at 11am eastern today. Reminder that this week’s report is based on data reported last Friday, so any impacts from this week’s weather events will not show up until next Wednesday’s report.
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News & Views
View AllEnergy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.