Worst Of The Winter Doldrums May Be Behind Us

Market TalkFriday, Jan 24 2020
Slow-Motion Meltdown Continues

Oil futures are trading lower for a fourth straight day, gasoline prices are down for a fifth, and ULSD for a seventh as concerns over growing supplies and shrinking demand continue to plague the market. Despite this morning’s round of selling, prices are still one to two percent above Thursday’s lows, as the DOE report helped the market find a short term bottom with a few signs that the worst of the winter doldrums may be behind us.

It’s worth noting that while fear is clearly driving the trading bus this week, the sell-off has left several short term technical indicators in oversold territory we haven’t experienced in two+ years, meaning when a recovery rally starts, it could be significant.

Refiners may be breathing a sigh of relief after yesterday’s report as the diesel demand patient that appeared have its heart stop beating for three weeks came back to life with a 33 percent increase in consumption estimated last week. While that is consistent with seasonal demand patterns, there’s always a sense that the industry has to hold its breath for a few weeks until we see the demand come back online after the holiday season.

Gasoline inventories reached a new all-time high last week, passing 260 million barrels for the first time ever. This was the same week in which gasoline stocks set a record high a year ago, and seasonally we’d expect inventories to top out in January before beginning their four month decline as we move through the various phases of the spring RVP transition.

As the inventory charts by PADD show, the glut in gasoline is primarily contained to the Gulf Coast, while PADDs, 1, 2 and 5 are holding near their five year average levels. With PADD 3 stocks far above anything we’ve ever seen before, it’s a bit surprising that USGC basis values remain stronger than a year ago, and in their normal range for January.

Speaking of basis strength, the West Coast is at it again with LA CARBOB values surging north of 30 cents/gallon over futures Thursday. Anywhere else in the country you might think a hurricane had taken out several refineries if you saw that type of price action, but it’s somewhat pedestrian for the West Coast in recent years.

Crude oil output held at its all-time high 13 million barrels for a second week, and the EIA’s projections suggest this number should continue to grow this year even though drilling activity has slowed as the huge backlog of drilled but uncompleted wells will bring more barrels to market.

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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