Weak Data From China Is Getting Blamed For The Soft Start In Both Energy And Equity Markets This Morning
Diesel prices are moving lower for a 4th straight day and are down 19 cents from Thursday’s high trade after chart support failed to hold on Monday. Gasoline and crude oil prices were following diesel’s lead lower this morning, with RBOB futures down nearly a dime since Friday before bouncing back to break-even levels around 7:30 central.
Weak data from China is getting blamed for the soft start in both energy and equity markets this morning. While sales, production and investment all moved higher on the year, the numbers were well below what many forecasters were expecting, and more troubling was their Bureau of Statistics stopped reporting unemployment figures for youth, which had recently soared to record highs. The weaker economic activity isn’t slowing down Chinese refineries however as the new capacity brought online in the past 2 years helped hold output near record levels in July and continue heavy export activity despite seasonally strong domestic demand.
The bounce in gasoline prices off of overnight lows followed US retail sales data for July that showed the strongest gain since January, even though that report seems to have done little to move equities off of their lows for the day. The correlation between daily moves in energy and equity markets had largely fallen apart over the past couple of weeks, which seems to be helping RBOB shrug off the drop in stocks so far.
The volatility index for WTI has dropped to its lowest level since 2019 as global markets seem to be finding some sense of temporary equilibrium after the chaos of the COVID years and shock of the Russian invasion changing the direction of the global energy trade.
What a difference a week makes: Group 3 Unleaded basis values have dropped nearly 30 cents over the past week as concerns about a supply squeeze ahead of the fall RVP transition seem to be subsiding. Neighboring Chicago RBOB prices followed the Group’s strong rally over the past month, and now look like they could be set to collapse in sympathy as well. West Coast basis levels remain elevated heading into the transition, with last year’s September spike north of $2/gallon premiums still fresh on many minds.
Add another competitor to the renewable feedstock wars: A recent test showed Hydrotreated Vegetable Oil (which is what the rest of the world calls Renewable Diesel) lowered emissions 83% when replacing traditional bunker fuels on ships. That should come as no surprise to anyone who has been watching the rapid growth in RD production the past few years, and the question for producers is simply which market will provide the most incentive (aka environmental credits) for their RD, SAF or marine HVO.
The NHC is still tracking 2 potential storm systems this morning. The good news is the first system that could form in the Caribbean, is only given 10% odds of developing, and the 2nd storm that has slightly higher odds (30%) looks like it’s moving far enough north that it should stay over open water if it does develop further.
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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.