News & Views
Energy Prices Struggle To Find A Bottom
Energy prices are struggling to find a bottom after an overnight bounce was erased in early trading Tuesday morning, adding to Monday’s heavy losses. The selling so far this week has wiped out roughly half of last week’s strong gains, and sets up more downside on the weekly charts if product prices can’t figure out a way to sustain a rally over the next few days. It’s a similar story for U.S. equity markets, after an afternoon bounce Monday limited the damage from a heavy morning sell-off, some overnight buying has given way to more selling, threatening a larger move lower in the coming weeks.
Tropical Storm Beta weakened as it made landfall, which meant Texas refiners could maintain operations through the storm. Flooding is still a likely possibility over a wide area as this system moves slowly and dumps large amounts of rain, but besides slowing recovery efforts for areas impacted by Hurricane Laura, it’s not expected to have much impact on energy supply infrastructure. Hurricane Teddy is staying offshore from the East Coast, but causing dangerous currents that could present some minor challenges for shipping traffic. With tanks stuffed full already, those limited challenges should not show up at the terminal level. After this, it looks like we’ll get a brief respite from storms as the system churning near Florida is given only 10% odds of developing this week, and so far nothing new is brewing off the African coast.
As the crack spread chart below shows, despite all of the refinery closures and port disruptions due to three storms in the past month, margins for plants along the U.S. Gulf Coast have barely moved, suggesting that healing for struggling refiners will have to come from the demand side of the economic equation.
The Dallas FED published a look at the looming fiscal budget shortfalls facing most states as tax revenues have plunged during COVID. The report notes that states dependent on income taxes are faring worse than those (like Texas) that rely on sales tax and don’t charge an income tax.
The EIA this morning took a look at how U.S. oil exports have been steadily dropping since reaching a record high in February.
New Restrictions Due To Rising COVID Counts
The fear trade is back on, pushing energy and equity markets sharply lower to start the week. New restrictions due to rising COVID counts are the headline of the day, spreading concerns that demand for fuels and other goods could plummet once again this fall.
RBOB gasoline futures are leading the energy complex, trading down by more than a nickel in the early going after a strong rally last week, as the heart of U.S. refining dodged another storm threat, and signs are growing that the seasonal demand slowdown is upon us.
We ran out of names for the 2020 hurricane season, and had to move to the Greek alphabet for just the second time ever as three new storms were named Friday. Tropical Storm Beta is expected to make landfall in Texas near Matagorda bay overnight, which keeps it far enough away from the Corpus Christi and Houston refining hubs that it should not be a major supply disrupter over the next day or two. The problem is that it’s expected to stick around for most of the week, and dump huge amounts of rain – more than a foot in some areas – that will cause flooding, some of which will be in areas still recovering from Hurricane Laura. The storm is also close enough to shore that it could move back out to sea where it can continue to gather strength and add to the rainfall totals.
Meanwhile, Hurricane Teddy is making its way towards the Eastern coast of Canada, but looks like it’s staying far enough to the east that it should miss the Irving refinery in St. John. There is another system near Florida being tracked by the NHC, but it’s given just 20% odds of developing this week.
Remember when we were worried that IMO 2020 specs would mean a shortage of diesel this year? A Bloomberg article notes that Refiners are having to blend kerosene into VLSFO bound for ships because weak demand for jet fuel has them scrambling to keep tanks from reaching capacity. This unusual blending pattern for distillates is expected to continue in the coming year, and keep pressure on ULSD prices as inventories hold near record highs.
Money managers continue to have mixed feelings about energy contracts, making small increases to net length in WTI, while slashing Brent positions last week. RBOB and ULSD contracts saw only minimal changes on the week.
Baker Hughes reported a reduction of one oil rig last week, as drilling activity remains near record lows in the U.S.
Saudi Arabia's Energy Minister Levels Criticism
Energy futures have had their strongest week since June, even as equity markets have struggled and the U.S. dollar has strengthened, following several signs that producers are up to the task of rebalancing the global supply/demand equation for oil.
Thursday saw a strong move higher after Saudi Arabia’s energy minister leveled harsh criticism of non-conforming OPEC members, and leveled threats at oil market speculators who had been shorting prices this year at an OPEC & Friend’s compliance meeting. The UAE, an apparent target of the criticism, already has indicated it would compensate for its overproduction. The cartel also indicated it would hold a special meeting in October if needed to help stabilize prices.
Reports that Libyan oil exports would resume are getting credit for the early round of selling, although some profit taking after the strongest week in three months – particularly given the weak action in stocks – also seems to be influencing the early action.
Hurricane Wilfred is expected to be named over the weekend as it spins in the South western gulf of Mexico. The current forecast has it weakening back to tropical storm status before reaching the Texas Coast, but you’ve seen how those predictions have been going, so don’t be surprised if it strengthens further. Corpus Christi area ports and refiners look to be the most likely at risk, but Houston is still in the threat cone as well.
Hurricane Teddy is expected to stay offshore as it moves north off the East Coast, but could become a threat to the Irving refinery in St. John if it follows the western half of its forecast cone.
FED Signals Interest Rates To Remain The Same
It’s a quiet start to trading a day after crude oil and gasoline contracts shrugged off weaker equity markets and a stronger dollar to post a 5% rally. Inventory draws in crude oil took much of the credit for the rally, although demand estimates showed there is still plenty of work to be done to get consumption back to pre-COVID levels. The FED signaled it wouldn’t raise interest rates for nearly three years in its FOMC announcement, which also earned some credit for the rally in energy prices. Whatever the cause, this week’s bounce has reduced the risk of a near-term technical collapse, with the low prices from June passing their first major test of their chart support capabilities. Longer term there is still plenty of downside risk on the charts unless prices can push through their August highs.
Hurricane Sally made landfall with winds over 100 miles an hour, but like Laura a few weeks ago, spared refiners in the path with a late eastward shift. The plants that had reduced rates ahead of the storm appear to have avoided major damage and terminals in the region quickly reopened even as the system continues to dump huge amounts of rain and create widespread flooding.
Although it doesn’t have a name yet, the largest current storm threat could be the disturbance over the Southwest Gulf of Mexico that’s being given 90% odds of forming over the next five days, and looks like it will head north and east, putting the refining centers once again in the threat zone. Speaking of names, there’s just one name left on the list for 2020, and since that will probably get used up in the next few days, we’ll then move on to the Greek names to finish out the record setting season.
The chorus of concern for diesel continues as the DOE’s weekly demand estimate dropped to its lowest level since May last week, and inventories are once again on the cusp of reaching a record high. Add to that the incremental supply from barrels normally destined for jet fuel production and it appears that diesel may remain the weak link in the refinery chain, after more than a decade of being the primary moneymaker for many.
D4 Bio RINs continue their rally, pushing to $.80/RIN for the first time since March 2018, on the heels of stronger Soybean prices that surpassed $10/bushel for the first time in nearly three years.
Refineries Operate Through The Storm
Sally made landfall as a Category 2 hurricane at around 7 a.m. CDT this morning. As its path shifted further eastward, both Chevron’s Pascagoula refinery and Shell’s Saraland refinery decided to continue operating through the storm. While Sally is expected to cause wind damage and flooding to areas that are directly hit, for now it seems the impact to energy infrastructure will be minimal.
There are two more new named storms churning out in the Atlantic: Hurricane Teddy and Tropical Storm Vicky both look to be content to exhaust themselves out at sea. However, a disturbance in the Gulf given a 40 percent chance of cyclonic formation will be watched over the next couple days.
Crude oil futures are leading the way this morning, up 2 percent so far on the day with prompt month gas and diesel contracts up around 1.25 percent. Big numbers from the American Petroleum Institute seem to be taking the credit for this morning’s rally. The API estimates a crude oil draw of 9.5 million barrels last week, likely due to Gulf Coast refinery restarts after Hurricane Laura passed through.
Prompt month RB and HO contracts have almost completely recovered the rout they suffered back on 9/8. With about three cents left to climb, both refined products benchmarks are within striking distance of invalidating a bearish chart pattern than has been forming for the past four to five months. A confirmation of the Institute’s estimated crude draw by the Department of Energy’s report (due out 9:30 a.m. CDT) could be enough to push gas and diesel over that last hurdle.