Tug Of War Between Reopening Optimism And Delta Variant Fears
Energy prices continue to hover close to multi-year highs, as markets endure a tug of war between reopening optimism and Delta variant fears.
The IEA’s monthly oil market report forecast that the world could see the largest draw in crude oil inventories in more than a decade this quarter as refiners ramp up run rates to try and keep pace with reopening around the globe. The report noted that this phenomenon should continue pushing prices into a steeper backwardation as suppliers will be challenged to keep pace with the uptick in demand, and noted how that phenomenon is pushing prices to multi-year highs and threatening the economic recovery. The report ended with a call for OPEC to figure out its output plan as the volatility caused by its lack of decision making is not, “…in the interest of either producers or consumers.”
The forward curve charts below show how the recent increase in demand has pushed most petroleum contracts into a steeper backwardation, and put downward pressure on refinery margins as products have struggled to keep pace with the rise in crude prices. On the other hand, the crack spread chart does not account for the drop in RIN values that has taken roughly $2/barrel off the cost of doing business for US refiners over the past 5 weeks, which increases their net margin and largely offsets the drop in gross seen on the charts.
Technology topping out? An EIA report this morning highlights that most US drilling regions saw production/well drop in the past year, after more than a decade of steady increases that saw numbers increase 5 to 10 fold thanks to rapidly improving technology. Only the Bakken saw its total output per well increase to nearly 900 barrels/day (up from roughly 150 in 2007). This likely doesn’t mean that drillers are losing their edge however. The report also notes that the dip is likely due to unplanned shutdowns due to COVID, and that the rates are likely to increase again once more normal drilling patterns continue.
Hovensa no more: The refinery that threatened to bring more refined products to oversupplied Atlantic basin looks like it’s officially out of the game as the owners filed for bankruptcy after being forced to shut operations, and amidst multiple investigations from the US Attorney and EPA. Since that plant never really got back to full run rates, it’s unlikely to create any supply disruptions, but it may save another facility in the US or Europe from closing their doors as the race to rationalize refineries continues.
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.