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Upward Trend Intact For Oil And Diesel Prices
Oil and diesel prices are trading at eight month highs this morning, after chart support held earlier in the week, keeping the upward trend intact. Global equity prices were moving higher overnight, as the U.S. looks closer to passing a new stimulus package, which seems to be outweighing the concerns of COVID counts reaching new record highs. Gasoline prices aren’t far behind, but have not yet broken their November highs as there are more signs of demand destruction both due to normal seasonal factors, and stay-at-home orders.
The bounce this week (assuming prices don’t reverse lower later today) leaves the door open on the weekly charts for WTI to make a run at $50 before year end, which should add another 10-12 cents on refined product prices if that rally materializes.
A new deal: OPEC & friends made a new agreement this week that will allow for a gradual increase in oil production in 2021, but on a smaller and slower scale than what had been previously rumored. The deal also limits the timeline on producers who need to make up for previous failures to limit their production to agreed-upon levels, which could keep actual output lower for longer.
D4 RIN values surged to a new multi-year high yesterday as soybean prices rallied following a recent pullback. Ethanol RINs were also rallying, but have not yet made it back to the $.70 mark they hit a few weeks ago. The EPA let their statutory deadline pass without releasing a final renewable volume obligation for 2021 (something that was common prior to 2017) which suggests those targets could be set by the new administration’s appointees who will presumably be less friendly to refiners.
The rally in D4 RINs is helping the value of Renewable Diesel (which receives 1.7 RINs for every gallon blended vs 1.5 for biodiesel). A NYT article yesterday highlighted why RD is becoming the new big thing for US refiners, while also discussing how it remains dependent on government incentive programs, and the risks of a feedstock shortage in the coming years.
Energy Futures Cautiously Coasting
Energy futures are cautiously coasting while OPEC+ closes in on a deal to either extend or ease output curbs into 2021. Today’s meeting should break the four-day impasse with some hinting at a compromise for a small production increase of 500,000 barrels-per-day (bpd).
Shell announced yesterday that the phased shutdown of its 240,000 bpd Convent, LA refinery began Monday evening. The permanent shutdown is anticipated to be completed by Christmas. The refiner plans to reduce its refining portfolio from 14 to around 6 plants by 2025 in an effort to reduce its carbon footprint and focus on products with lower emissions and alternative fuels. Shell is not alone in the pivot to lower carbon fuel, as other refiners are increasingly investing in renewable diesel.
Yesterday’s DOE report showed a moderate decline in crude stocks while distillate and gasoline inventories swelled as fuel demand continues to slide. Last week’s rise in distillate stocks broke its ten-week streak of drawdowns.
PADD 5 (West Coast) diesel inventories rested below its seasonal five-year range seemingly due to a surge in eastbound truck freight as more consumers choose to shop online versus brick-and-mortar stores.
Week 48 - US DOE Inventory Recap
Heating Oil Futures Hold On To Overnight Gains
Heating oil futures seem to be the only contract of the big three energy benchmarks attempting to hold on to slight overnight gains as prices drift lower for a fourth day in a row. If sustained, the gasoline’s relative strength compared to its distillate counterpart will hit fresh multi-month lows - a downward trend that increased shutdowns due to the virus will likely exacerbate.
A lack of activity from the world’s largest oil cartel seems to be taking the blame for the selling pressure this morning. Discussions between OPEC & Friends on next year’s production level stalled for a third day, with the apparent snag coming from a disagreement between the UAE and Saudi Arabia over how historically non-compliant countries should remediate their overproduction in 2021.
Our friends across the pond became the first country to approve one of the new COVID-19 vaccines. Just under a million doses of Pfizer and BioNTech’s shot will be available to the most at-risk patients in the UK next week. Equities markets don’t seem to be reacting this morning, perhaps due to most players already pricing in accelerated approvals for coronavirus inoculations.
The American Petroleum Institute published national inventory builds across the board yesterday, with the biggest bumps showing up in crude oil and gasoline stocks (+4.15 million barrels and +3.4 million barrels respectively). Diesel stocks lagged with an estimate 300k barrel build last week. The EIA’s report is due out at its regular time this morning (10:30 EST) and will likely be looked to for price direction for the rest of the day, if not the rest of the week.
While month-old upward trend lines on daily refined product futures charts have been broken this week, the bullish weekly trend line still has a chance to extend this fall’s rally. Gasoline futures will need to end the week above the ~$1.22 level, diesel futures above ~$1.36, in order to maintain upward momentum.
Energy Futures Are Moving Modestly Lower For A 3rd Trading Session
Energy futures are moving modestly lower for a 3rd trading session (Including last Friday) as indecision from OPEC and concerns of a post-Thanksgiving slowdown in demand combine to keep buyers at bay.
The upward sloping trend lines started when prices bottomed out November 1st (some 30% below current levels) are still intact, and if the bulls can hold on, there’s still a strong technical argument for higher prices in the weeks to come. Peg the $1.20 range for RBOB and $1.35 range for ULSD as must-hold levels for the bulls this week. A break of below those levels suggests we could see a quick 10-15 cents of downside as a correction of the furious November rally.
OPEC & friends were unable to come to an agreement and delayed an official announcement to Tuesday, and then again until Thursday, which seemed to spook the market and encouraged sellers to step back in Monday afternoon. Prior to the meeting it seemed inevitable that the cartel would at least extend its production cuts, but suddenly that “no brainer” option appears easier said than done.
There weren’t any new refinery shutdown notices in the past 24 hours, but there was some more bad news. A multiyear study done on Texans living near oil refineries suggests that cancer risks increase notably. That’s not necessarily a surprise given the volatile organic compounds involved in the refining process but a long term study of this type does add another argument for the anti-fossil fuel movement in addition to the climate change arguments that are becoming more mainstream. Meanwhile, a separate report suggests the EPA and other air-quality-monitoring agencies are under-estimating the pollution caused by refineries.
Similar to what we saw with European contracts in Friday’s report, the CFTC is showing money managers made increases in net length for WTI, RBOB and ULSD last week, jumping on the bandwagon as prices rallied to 8 month highs. WTI saw a mix of new long positions and short covering both contribute to those increases, but open interest remains near a 4 year low, as new competing contracts for oil based in Houston and in a few Asian markets makes the Cushing OK based contract less appealing, and the general enthusiasm for oil around the world continues to be subdued.
An EIA report this morning highlights the impact COVID shutdowns last spring had on the US petroleum trade as the country briefly reverted to a net importer of fuel, after reaching record high export levels in February.
Energy Futures Taking A Post-Holiday Breather
After rallying to 8 month highs ahead of Thanksgiving, energy futures are taking a post-holiday breather, with small losses this morning on top of minor drops seen in the combined trading session from Thursday and Friday. This type of pullback was overdue after the 30%+ November rally, with several short term technical indicators moving into over-sold territory last week. It’s too soon to call an end to the rally however as the upward trend lines are still intact, and we’ll need to see products drop by another nickel before this move will start looking like a reversal instead of just a short term correction.
It’s the last trading day for November product futures, and since spot markets weren’t assessed Thursday or Friday, there’s bound to be a little confusion as to the actual price changes expected at the racks this evening. For markets like the Gulf & West coasts hat have already rolled to trading against January futures, it’s looking like 1.5 cent combined drops in futures (roughly 1/2 cent from last week, a penny from this morning) while those still trading vs December futures like the NYH and Group 3 spot markets are on pace for slightly larger declines.
OPEC & Friends are officially meeting today to discuss output plans, after informal weekend meetings struggled to figure out a way to factor in rapidly rising Libyan output that’s offsetting a large portion of the current agreement to limit production.
S&P Global (FKA Mcgraw Hill) the parent company of Platts, is reported to be in advanced talks to acquire IHS Markit, the parent company of OPIS. You may recall a decade ago when Platts tried to acquire OPIS directly, and was met with a flurry of objection from the energy industry before the deal was canceled. No doubt we’ll see a similar backlash now to the combination of 2 of the 3 major pricing platforms in US petroleum spot markets (not to mention numerous other competing services across industries held by these two giant companies) but given the enormous size of the deal ($44 billion), it seems like only federal trade commission rulings will be enough to stop the transaction.
The latest refining casualty: Neste announced it would shutter its Nanntali Finland refinery in the first quarter of 2021 in an effort to save costs and focus operations on other facilities.
A new facility on the chopping block? The Suncor refinery in Denver, already beleaguered by numerous operational upsets on top of the weak margin environment, is now facing the risk of shutdown as state regulators consider not renewing its operating permits due to environmental concerns.
A Rystad Energy report suggests that despite the rash of refinery shutdowns announced this year – 28 so far – capacity additions will still outpace closures globally forcing utilization rates to stay at relatively low levels. A move to replace older, smaller facilities with larger, more efficient plants is driving the net increase in capacity that’s expected to change several emerging market countries from importers to exporters of refined products.
Baker Hughes reported 10 more oil rigs were put to work last week, bringing the total US oil rig count to its highest level in 6 months. The Permian basin account for half of the weekly increase, while the Eagle Ford shale added 3 more rigs on the week.
The CFTC’s commitment of traders report is delayed until later today due to the Thanksgiving holiday, but the ICE report suggests large speculators are jumping back on the energy bandwagon as prices rally. Money Managers made large additions in net length held Brent and Gasoil contracts for a 2nd straight week. The increase in Brent net length was driven by new longs entering the market (betting on higher prices) whereas the move in gasoil was primarily driven by previous shorts getting out of the way.