Trio Of Supply Concerns Dissipate

Market TalkMonday, Oct 12 2020
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Energy prices are under pressure for a second straight session following strong weekly gains as a trio of supply concerns are dissipating, which seems to be outweighing the stimulus optimism fueling another rally in equity markets.  

Hurricane Delta made landfall as a Category 2 storm Friday evening, just 13 miles from where Hurricane Laura hit six weeks ago. While Delta didn’t pack the punch that Laura did, and didn’t stick around long enough to dump the huge amounts of rain parts of the gulf coast saw from Hurricane Sally, it did produce wide spread power outages that are hampering the supply network. Most of the refiners in the Pt Arthur area had to shut units down due to storm-related issues, and Colonial pipeline’s main diesel line is still shut down as they await power to be restored near the Lake Charles area. 

No word yet on the status of the Lake Charles refineries, but based on the storm’s path, and the damage we’ve already seen further away in Pt. Arthur, it appears likely both facilities will have to go through another round of repairs to resume operations. Just like with Laura, it will likely be a few days until the damage can be assessed at the facilities that were just resuming operations after Laura and will now start over again.  It appears that the plants around Baton Rouge and New Orleans, which were originally in Delta’s crosshairs, have dodged yet another bullet in the busiest hurricane season on record. 

There are roughly seven weeks left in the 2020 Atlantic hurricane season, and the NHC is giving 30% probability that a system churning east of the Windward islands will develop in the next five days. Those are relatively low odds, and wind conditions don’t appear favorable at the moment, but in this record setting year, it seems like a mistake to ignore any potential storm.

Good news for Libya, bad news for OPEC? The beleaguered country’s oil output is coming back online, complicating OPEC’s output plans as Libya has been exempted from previous production cuts. 

The Norwegian oil strike came to an end after successful mediation last week, which will keep more than 300mb/day of oil production online, adding to the downward pressure on prices.

Baker Hughes reported four more oil rigs were put to work last week, the third weekly increase in a row. Texas and New Mexico accounted for the build with Permian and Eagle Ford basins each adding one rig on the week, and two more were added in smaller unclassified areas.

Money managers continue to be unimpressed with oil contracts, making small reductions in net length in WTI and Brent for a second week, while making small increases to bullish wagers on refined products. RBOB gasoline continues to see a counter-seasonal bet on higher prices from the large speculators, while ULSD contracts remain in a net short position as the big funds bet diesel prices will lag.

New cleaner energy options continue to be a major story that’s getting even more attention given the polarity of the Presidential candidates on the issue. An unintended consequence in the surge of “green” stimulus packages is that they’re driving up costs for these projects, similar to what we saw with the spike in home remodeling & pool installation projects this summer. A Rystad energy report last week highlighted how those rising costs may hamper the development of one of the more promising alternatives, Green Hydrogen.

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

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The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

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Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

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

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