News & Views
Colonial Pipeline Completes Damage Assessments
It’s a mixed bag for energy prices to start the last trading day for August, which seems a fitting end for a month that had plenty of back and forth action. Oil prices are on the cusp of six month highs following reports that Abu Dhabi is cutting its deliveries by nearly 30 percent in order to comply with the OPEC & friends output agreement. Refined products, meanwhile, are struggling to break even on the day as the damage assessments from Laura continue to show relatively minor impact to supply infrastructure from such a major storm.
Perhaps the most important news over the weekend was a report that Colonial pipeline had completed its damage assessments and was operating across the system, even in the areas like Lake Charles that took a direct hit from the storm, meaning the SE and East Coast markets should not see any supply disruptions.
The Phillips 66 and Citgo refineries located near Lake Charles are expected to take several weeks to come back online, with reports suggesting both sustained damage from the storm, although details remain scarce. In an ordinary year losing nearly 700mb/day of refining capacity would be enough to push Gulf Coast cash prices and futures higher, but with so much excess capacity available due to COVID demand destruction, the price impact has been minimal, and in some cases we could see downward pressure as exports are delayed.
Power outages seemed to be the biggest hindrance to restarting pipeline and refinery operations around the Beaumont/Port Arthur hub, but most of those issues seem to have already been sorted out, with most facilities reported restarts underway.
We’re near the seasonal peak for hurricane activity in the Atlantic basin, and there are four more potential storms being tracked this week. The system off the coast of Florida is given a 70 percent chance of developing further, but is expected to move away from the coast and stay out to sea. The other three will need to be watched, as they could eventually point towards the U.S.
Baker Hughes reported three more oil rigs were taken offline last week, two of which came from the Permian basin, dampening recovery expectations after last week’s increase. A Reuters story this morning details why deals done during the second shale boom may now hinder the recovery in domestic drilling.
Money managers were buying up RBOB contracts ahead of the storm, pushing the net length held by the large-speculative trader category near a six month high. With Laura sparing most of refining country, the fall RVP transition in process and the driving season behind us, it’s likely we’ll see a liquidation of those positions before long. Crude and diesel contracts saw minimal changes on the week, and open interest in energy contracts remains subdued.
Refineries Initiate Restart Efforts
We’ve reached the calm after the storm as the Gulf Coast refining industry is assessing the damage from Hurricane Laura, and most companies seem to be breathing a big sigh of relief. Unfortunately, much of the country is still going to feel an impact from this storm, as flooding potential stretches through the mid-west and east coast through the weekend.
Three of the refineries that had initiated shutdowns ahead of the storm have already filed with the state that they were beginning restart efforts, and more are expected to follow suit today as reports suggest the plants outside of Lake Charles likely avoided major damage thanks to the eastward shift in the storm’s path prior to landfall.
We will probably not know the status of the two refineries that were operating in Lake Charles before the storm until next week, since damage assessment crews were not allowed into the area Thursday. A major fire in a nearby chemical factory, and the closing of the Interstate 10 bridge due to a runaway casino boat are just a couple of examples of issues that may be hampering those efforts.
The one critical unknown in terms of regional supply is whether or not the Colonial station near Lake Charles suffered any damage. The pipeline continues to operate downstream, but if Lake Charles is blocked, the barrels originating in the Houston and Port Arthur hubs won’t be able to move through to the rest of the country. There are no reports that the facilities were damaged, they just don’t know since accessing the location may still take a couple more days. Explorer pipeline reported no damage to its facilities, but will still see slight delays in restart due to uncertainty from the local utilities on power supply.
The bad news for refiners that managed to avoid operational issues during the storm is that the boost in margins was short-lived as both gasoline and diesel prices have crumbled, and are now threatening a technical break to the downside that could drag many plants back to the cusp of break-even levels.
Don’t relax just yet. As is often the case in active hurricane seasons, major hurricanes aren’t isolated events, (i.e. Harvey/Irma/Maria in 2017, Gustav and Ike in 2008, Katrina/Rita/Wilma in 2005). Already this morning, the National Hurricane Center is tracking two new potential systems crossing the Atlantic, both given 30 percent odds of development next week.
D4 (Bio) RINs hit a fresh 2.5 year high Thursday, as surging soybean prices and falling diesel prices gives a poor outlook for incremental bio blending. Exports to China and weather damage from the Derecho earlier in the month are both getting credit for the rally in Soy prices. Corn and ethanol prices have also been rallying, but have not kept pace with bio, partially due to the fact that ethanol blending is less discretionary, which has kept D6 RINs from pushing through recent highs so far.
The EIA this morning took a closer look at how U.S. refineries have been forced to make drastic operational changes this year due to COVID demand impacts. Perhaps the most impressive piece is how the plants have been able to dramatically shift product yields in response to the wild swings in gasoline and jet fuel demand. That unprecedented shift towards diesel production also helps explain why diesel prices barely flinched this week even when it appeared that Laura might shut down 20 percent of the country’s refining capacity.
Hurricane Shifts From The Heart Of Refining Country
Energy futures continue to retreat this morning as the strongest hurricane to hit the Gulf Coast in decades appears to have shifted just enough to the east to avoid damaging the heart of refining country. Equity futures are also pointed lower this morning as another weekly jobless claim report north of one million gives a dose of reality to indices that have reached record highs, despite the damage done to the economy by the COVID fallout.
Hurricane Laura made landfall overnight as a Category 4 storm, the strongest to hit the Louisiana coast in 168 years. Another shift to the east prior to landfall meant many gulf coast facilities look like they dodged most of the storms wrath, and some Houston-area terminals are already loading trucks this morning.
Unfortunately for the residents and refineries around Lake Charles, the storm did not appear to move far enough east for them to avoid a direct hit, although it’s too soon to say what damage may have been done to those facilities, but early reports from the city suggest substantial flooding and wind damage. One of three refineries around Lake Charles was already idled due to COVID-related demand destruction, and another was running well below normal rates, so it seems that in total we may only see roughly three percent of total U.S. refining capacity damaged by the storm, compared to estimates closer to 20 percent had the storm hit further west.
Although Lake Charles is an origin point along the Colonial pipeline, as long as the Houston/Pasadena and Port Arthur/Beaumont hubs weren’t damaged, we likely won’t see any major impact on pipeline deliveries. Explorer pipeline did shut down temporarily to allow the storm to pass, but it too may see limited impact thanks to the eastward shift of the storm since it originates from the Houston and Port Arthur hubs.
Now that the storm has passed by the majority of petroleum supply infrastructure, it may become a demand killer as it spreads flooding rains among large parts of the U.S. until re-emerging off the East Coast this weekend.
Yesterday’s DOE report was largely ignored due to the focus on the storm, but it did have some good news as demand estimates reached their highest levels since the start of COVID shutdowns, and in some cases demand has returned to the low end of the five year seasonal range.
Note the large declines in export volumes and refinery runs in September 2017 in the aftermath of Harvey (red line in the seasonal charts below) and you’ll get a good idea of what next week’s DOE report might look like due to the widespread shutdowns ahead of Laura’s landfall. The difference in the two storms so far is that more plants and ports shut ahead of the storm, which should mean a faster recovery when it moves past barring catastrophic damage.
Week 34 - US DOE Inventory Recap
How Will The Election Impact Oil Production?
Despite large declines in inventories, RBOB futures are tumbling to start Wednesday’s session as the latest forecast track for Laura seems to have taken the worst case scenario off the table, even as the storm rapidly intensified overnight.
Hurricane Laura is now a Category 3 hurricane, and could become a Category 4 before it hits the coast overnight tonight with over 120 mph winds. The models released at 1 a.m. shifted the storm’s path slightly east, closer to the Lake Charles, LA refineries, and further away from the Port Arthur/Beaumont plants. The latest track moves the Houston and Galveston refineries outside the forecast cone, which rules out a direct hit on that area, and may help explain the pullback in futures this morning.
While almost all of the refineries in the area, representing 20 percent of the country’s total capacity, are either shutting down or preparing to idle some units as a precaution, right now it looks like the Lake Charles area facilities are going to get the worst of Laura’s surge as they’re on the more dangerous side of the storm.
Why this storm won’t be the “next Hurricane Harvey” in terms of energy supply disruption: Harvey stayed on the Gulf Coast for a week, and dumped five feet of rain on some spots. Laura will make landfall Thursday morning and be into Central Arkansas by Friday. Although 10-15’ of storm surge and 15” of rain is nothing to take lightly, the recovery efforts from the damage that is certain to be done along the coast can begin much faster since this storm won’t stick around for long.
The API was said to show large declines in oil and gasoline stocks last week, of 4.5 and 6.4 million barrels respectively, while diesel inventories built by 2.3 million barrels. The DOE’s weekly report is due out at its normal time this morning, and will likely be ignored as the storm has made last weeks’ figures irrelevant.
Wondering how the election may impact oil production? Take a look at this Rystad Energy study on oil output during the past 80 years by President and party. The study suggests that the potential restrictions imposed on oil drilling should a new president be elected may actually increase oil output as it will make onshore shale plays more profitable.
Hurricane Laura Threatens U.S. Refineries
Gasoline prices are approaching six-month-highs as Hurricane Laura poses the biggest threat to U.S. refineries since Hurricane Harvey three years ago. Oil and diesel prices are moving higher as well, but are not keeping pace with gasoline – which is often the case in storm situations – and seem somewhat dubious about the long term impact this storm may have on an oversupplied market.
The Nasdaq and S&P 500 reached new record highs as trade and virus optimism kept the trend lines pointing higher, while the DJIA is undergoing a major overhaul. In the latest sign of the COVID market fallout, ExxonMobil is being removed from the DJIA, while Salesforce (dot com) will now be included.
While Marco fizzled out and spared Louisiana, Laura was upgraded to a Hurricane this morning, and 13 percent of the country’s refining capacity is in the direct path of the storm based on the latest models. The current forecasts have the storm coming on shore Thursday morning, as a category 3 “major” hurricane, just east of Port Arthur, TX. Plants in the Port Arthur/Beaumont hub have announced that they are reducing rates and/or idling units until the storm passes. The path of the storm could actually be just as troublesome, if not more, for plants around Lake Charles, LA, as they are on the more dangerous side of the storm, and could get a worse surge/flooding than the plants closer but on the west side. There is still a wide cone of uncertainty with this storm’s path, and even the Houston-area plants could still be impacted if the storm shifts further west.
Those plants that can continue operating are suddenly seeing their best margins in five months, a much needed relief for plants struggling to stay afloat financially. The economic hardship of refineries is one reason Laura’s impacts may not be as widespread as we might normally expect, since there’s at least one million barrels/day of capacity already idled due to weak demand, which should allow for some plants to increase rates and help offset the losses from others. In addition, many Gulf Coast refineries now rely on exports for nearly 20 percent of their production, so they will need to bring more product inland until ports can reopen.
That said, if the major pipelines in the region have to close due to power or flooding issues, then the potential for supply issues becomes more widespread in short order.
If Laura does make a significant impact, don’t be surprised to see states and the EPA ease RVP restrictions on gasoline, since we’re just weeks away from the annual transition anyway and pollution levels have already been at their lowest level in decades thanks to reduced consumption this year. You may notice that several spot markets aren’t keeping pace with the September futures contract this week, as they’ve already begun their fall transition to less-stringent gasoline specs.
Rally Following Reports Of COVID Treatment Option
Refined products are rallying to start the week, wiping out Friday’s losses as a pair of Tropical Storms head for the heart of U.S. refining operations, and U.S. stock indices are set to rally following reports of a new COVID treatment option.
Good news, Hurricane Marco has weakened back to tropical storm status prior to making landfall on the Louisiana coast. This means we will not see a record set this week with two hurricanes in the Gulf of Mexico at the same time. Bad news is that Marco is turning along the coast instead of moving inland, which should mean heavy rains for the next two to three days to saturate the ground in refinery country just in time for Laura to show up. Laura is expected to be around a Category 2 storm when it hits land late Wednesday or early Thursday, with all of the refineries from Houston, Galveston, Beaumont, Port Arthur and Lake Charles still in the forecast cone.
Ports of New Orleans and Baton Rouge have been closed as the storms approach, and the Texas ports along the eastern part of the coast are expected to follow suit in the next couple of days. Corpus Christi’s port, meanwhile, is facing its own challenges after a dredging vessel apparently hit a propane pipeline, causing an explosion and fire that killed four people. Refinery operations in the area do not seem to be impacted, but it’s yet another disruption to import/export activities this week that are likely to cause challenges for plants trying to alleviate their excess inventory.
Baker Hughes reported an increase of 11 oil rigs drilling last week, the largest weekly gain since January, and only the second weekly increase since March. The Permian basin accounted for 10 of the added rigs, while the Eagle Ford and Williston (Bakken) plays continued to decline. Bulls will see this as confirmation that demand is returning, which is supported by some signs of diesel consumption ticking higher across West Texas, while bears will suggest the increase was driven by producers forced to drill to avoid losing their leases.
Money managers are starting to act modestly bullish for refined products, but continue to be neutral on crude oil. RBOB net length held by the large speculative trader category rose to the highest level since March, which is a counter-seasonal bet on higher gasoline prices. ULSD meanwhile saw its net position held by money managers turn from short to long for the first time since January. Both WTI and Brent saw slight declines in their net length, with the ongoing lack of interest being more of a story than the weekly change in positions.
Storm Threatens The Refining Country
Based on how 2020 has gone so far, it seems fitting that we might have two hurricanes hit the Gulf Coast on the same day next week.
The two storms, which will eventually be named Laura and Marco, and each will bring their own threats to the heart of refining country, and the current forecasts have them reaching land within a couple hours of each other. There’s still plenty of uncertainty with the path and strength (as there always is with these storms) and it is even possible they’ll interfere with each other, but based on recent trends, don’t be surprised to see either or both of these systems blow up into a category three and threaten significant disruptions to oil and product supplies. If nothing else, the combined size of the two storms will create headaches for petroleum import and export over the next week.
The good news for consumers is that the excess inventory on hand and slower than normal demand should act as a buffer to any potential supply disruption. Refiners and oil rigs in the path of the storm may choose to begin shutting operations earlier than they might in a normal year since the market is barely paying enough to keep them open anyways.
So far, the futures market hasn’t seemed to notice the threat. Instead, it is following the lead of equity markets lower, but there’s a good chance someone in the hedge fund world will eventually see the weather channel today and realize half the country’s refining capacity is staring at a potential disruption, and we might get a third consecutive afternoon rally to wipe out morning losses as a result. RBOB futures in particular are on the cusp of a technical breakout after surviving multiple selloff attempts only to finish higher for five straight days, and with just 10 days left in the summer-grade September contract, don’t be surprised to see a spike if today’s early losses reverse course.
For anyone looking to top off their inventory ahead of the storms, please remember to fill your vehicles before you fill your bulk tanks.
In other news, Saudi Aramco announced it was suspending its deal to build a $10 billion refining complex in China, the latest victim of the COVID demand fallout.
The California Energy Commission’s weekly stats showed the states production of gasoline and diesel ticked higher last week as NorCal plant increases more than offset a dip from various refinery issues at SoCal plants.
U.S. Oil Fund Receives Notice From SEC
The struggle for direction continues in energy markets as early losses Wednesday were wiped out in the afternoon, only to see another wave of selling to start Thursday’s session. Doubts about demand seem to be hitting both energy and equity markets this morning after U.S. jobless claims jumped back above one million last week.
While inventory declines for crude oil and gasoline stocks in Wednesday’s DOE report were seen as bullish, particularly compared to the API’s figures, which helped RBOB futures turn morning losses into afternoon gains, demand estimates dropped to multi-month lows, and seems to have helped keep the bulls at bay. Crude oil inventories declined for a fourth straight week in the U.S., even though exports dropped one million barrels/day. Assuming exports bounce back as they typically do following a large weekly move, we should see another draw-down in inventories next week.
Refinery runs were reduced in four out of five PADDs last week, and as we move into the fall turnaround season, we are likely to see additional reductions, some of which could be permanent if margins don’t improve soon.
Colonial pipeline finished repairs and restarted its main gasoline line Wednesday night, which should soon alleviate any lingering supply tightness in the mid-Atlantic region.
Nothing too exciting from the OPEC compliance meeting. Output cuts were left unchanged, and the group pushed for the four countries that have been overproducing to reduce rates to make up for their excess over the next two months.
The U.S. oil fund received notice from the SEC yesterday that it could face enforcement for its actions in April when oil prices went off the rails. As this WSJ article points out, this situation highlights the risks in commodity ETFs that retail investors seem to struggle to comprehend.
The second of three potential storm systems being watched in the Atlantic basin is now known as Tropical Depression 13, and looks like it will be at least a tropical storm heading for Florida early next week. My non-scientific opinion: Don’t be surprised to see the system strengthen more than is currently projected once it reaches warmer waters, as has been the case quite often the past few years. Also, there is a decent chance this could move past Florida and be a disruptive system for the refineries in and around Louisiana.
The first disturbance being tracked by the NHC will still likely be a storm (which is why we don’t yet know what the names will be) but may be moving too far west to end up in the Gulf of Mexico. Then again, they thought Hurricane Harvey would dissipate over the Yucatan and we know what happened there, so it’s too soon to write this one off completely. The third disturbance will need a few more days to decide what it’s going to be, but we very well might have three named storms active in the near future.
Week 33 - US DOE Inventory Recap
Downside Pressure On The Petroleum Complex
Yet another rally in energy futures has failed to sustain itself as prices start Wednesday’s session in the red, leaving prices stuck back in their sideways pattern, even as the S&P 500 rallies to new all-time highs this week.
The API was said to report a build in gasoline stocks last week of nearly five million barrels, which seemed to put immediate downside pressure on the entire petroleum complex that carried through the overnight session, even though crude and diesel stocks were estimated to have draws on the week of 4.3 and one million barrels, respectively. The DOE’s weekly report is due out at its normal time this morning.
As mentioned yesterday, both WTI and RBOB futures were looking toppy as they failed to break through the top end of their summer ranges, leaving them susceptible to a larger round of selling that could test the $40 mark for WTI and $1.16 for RBOB in short order.
OPEC & Friends are meeting today, but there’s a lack of chatter on new output quotas, with reports that the Saudi’s are more concerned with the cheaters in the group than making a new deal.
Colonial pipeline is still working to repair and re-open its main gasoline line that’s been shut for almost five days following a leak. While no specific timeline has been given, pipeline schedules and muted price action for both physical and futures contracts suggests they remain on track for reopening in the next few days. Allocations in markets north of the leak remain restricted as suppliers protect their contract accounts, but physical outages are not yet being reported.
RINs continued to rally Tuesday, pushing D4 RINs to a 2.5 year high, after the President promised to talk to the EPA about small refinery exemptions during a trip to Iowa to survey the extensive fallout of last week’s derecho. The storms have damaged nearly half of the state’s crop, and sent ethanol prices rallying along with corn and soybean prices.
Speaking of storms, the NHC still favors two new names storms developing in the Atlantic basin over the next five days, both of which still have some potential to threaten the U.S. Coasts. The first system in line could potentially be a gulf coast threat if it can get past the Yucatan peninsula, and the second looks like it could be heading towards Florida next week. The names of these storms will depend on which develops first. There’s a third potential system coming right behind these two, and as we near the peak of this record-setting season, it’s likely we’ll see new potential systems 1-2 times per week as tropical waves move off the west coast of Africa.
Energy Prices Struggle For Direction
Energy prices continue to struggle for direction this week, with crude prices down slightly, diesel up slightly and gasoline flat, leaving the complex stuck in its sideways summer trading range. Tomorrow OPEC & Friends are holding a meeting to discuss output quotas, which could be the catalyst to break prices out of their range. So far, there are no indications that a shift in policy has been made.
Even the shutdown of the country’s largest gasoline pipeline wasn’t enough to push RBOB futures through upside resistance at the 200 day moving average, and there are less than two weeks remaining of the summer grade futures contract trading in the prompt position, which is making gasoline prices look vulnerable to a big move lower if they can’t figure out a way to rally this week.
It’s a similar story for crude futures. Yes, WTI settled at its highest closing value in five months yesterday, but it has not threatened its intraday highs from earlier in the spring, and has sold off each time it’s traded near these levels. With Brent and refined products still entrenched in their sideways ranges, WTI is also looking like it’s in “rally or else” range.
Colonial’s main gasoline line remains shut, with repairs underway to fix a leak that spilled an estimated 63,000 gallons (1,500 barrels) in North Carolina. The pipeline also announced it was shifting operations to allow some gasoline to continue flowing via its main distillate line. Based on the muted market reaction, and the relatively small amount of fuel leaked, it appears that this issue will be solved in the next few days. There have been some allocation restrictions put in place in nearby terminals as a result of the reduced shipments, but so far nothing anywhere close to the widespread outages that we saw in 2016 when the pipeline had a similar shutdown following a leak.
The exception to the going nowhere rule is West Coast gasoline prices that reached their highest levels since March yesterday, thanks to a pair of unplanned refinery issues on top of the numerous economic run rate reductions.
The EIA this morning reported that bio-diesel production and margins have seen less of an impact from COVID demand destruction in 2020 than other fuels. The relative lack of impact is thanks to less blend percentage restrictions than ethanol and the various incentives in place to encourage blending. The report doesn’t mention that those incentives actually helped bio-diesel prices transact for negative values for an extended period this spring when ULSD futures were below $1. It does, however, warn that bio-diesel production will be challenged by growing imports of renewable diesel.
Just in time for no one to want to use it, the White House is enabling oil drilling in the Arctic National Wildlife Refuge. That would have been useful in 2008, not so much in 2020.
The national hurricane center is giving high probabilities for two new tropical storm systems to form in the Atlantic this week. The paths are unclear this far out, but either one still has the potential to be a threat to the U.S. next week.
Colonial Pipeline Forced To Shut Its Main Gasoline Line
Gasoline futures rallied nearly a nickel overnight after reports that Colonial Pipeline was forced to shut its main gasoline line due to a product spill near Huntersville, North Carolina, a suburb of Charlotte. It’s not yet clear what caused the spill, or how long repairs will take, although reports suggest the issue will take multiple days to resolve. RBOB futures have since pulled back to gains of less than a penny, as it seems the excess inventory and reduced demand are acting as a buffer to prices – unlike the last time Colonial was forced to shut line 1 back in 2016.
If repairs take more than a few days however, expect immediate shortages of product all along the south-eastern U.S. and mid-Atlantic states, as there simply is no way to efficiently replace deliveries from the largest pipeline system in the country. The longer the shutdown lasts, expect to see more downward pressure on USGC gasoline basis values, as pipeline buyers will not be able to ship products, forcing sellers to reduce offers to find a new home.
Meanwhile, West Coast gasoline basis values rallied to their highest levels in three-months last week following reports of unplanned refinery issues. While the rally has pushed West Coast values to their comfortable position as the most expensive in the country, the premiums are fairly pedestrian compared to what we’ve seen in previous years, thanks again to the buffer effect of ample supply and reduced demand.
Baker Hughes reported four more oil rigs were taken out of service last week, bringing the combined U.S. oil and gas drilling rig count to a fresh record low for the 33+ years they’ve been publishing this data. Once again, it was the Permian basin that accounted for the entire reduction, although this week the reduction came from the Texas side of the basin, while last week New Mexico had the drop.
Ethanol prices surged last week as damage assessments from the major Derecho storm that went largely unreported (it’s not a hurricane after all, even if it did have 100 mph winds) estimate that more than 37 million acres of crops were negatively impacted. Despite the sharp rally, ethanol prices remain some 25 cents below their early July peak, as overall inventory levels seem to be ample given depressed demand. Are you noticing a theme today?
Perhaps that explains why money managers continue to only make minor moves in their wagers on petroleum products as the market simply feels sluggish, taking some of the perception of reward out of the risk/reward equation. Large funds made small reductions in their WTI holdings last week, while making small increases on bets in RBOB, HO and Brent.
A Sideways Summer Trading Pattern
Oil prices continue to stagnate, holding near five month highs without daring to break out to the upside, while refined products cling to small gains to start the day, comfortably entrenched in their sideways summer trading pattern.
As the forward curve charts below show, physical diesel prices remain in a firm contango as the market deals with a continued overhang of inventory. Gasoline prices meanwhile are seeing only a fraction of the backwardation we’d normally expect this time of year, as excess supply and weak demand have taken out a large portion of the summer/winter RVP spread.
While futures prices continue to go nowhere in the short term, don’t be fooled into thinking that not much is going on, as there are several remarkable events underway in the industry that could be game changers long term.
See this WSJ article for more detail on the rapid and unprecedented shift to renewable production by traditional oil refineries. In addition, Shell announced it was planning to permanently close one of its Philippine plants due to the COVID demand fallout.
For more on the EPA’s methane ruling that raises the bar for climate change regulations, even though some of the industry’s largest players don’t want that.
The U.S. seized fuel cargos from four Iranian vessels headed for Venezuela, a new escalation in the sanction battle that at other times has been a shooting battle. It’s hard to remember that earlier this year the U.S./Iranian tensions had some market watchers calling for $100 oil.
Tropical Storm Josephine was named Thursday, but continues to be forecast as a fish storm that will stay out to sea and not threaten the U.S. coastline. There’s another system that is given 40% odds of forming just off the North Carolina/Virginia coast, but it too is pointed out to sea, so we can rest easy for a few days before the inevitable next wave of potential threats in this record setting storm season.
The EIA this morning reported on the influence of currency price moves on oil imports. The currency/commodity correlation was a major factor in oil prices for years, but had broken down the past several years before returning during the pandemic.
Oil Prices Settle At Their Highest Levels
Oil prices settled at their highest levels in five months Wednesday, but remain well below the intraday highs set earlier in the month, and seem hesitant to make a push to break out of their sideways trading ranges as monthly reports from OPEC and the IEA paint a bleak picture for consumption.
The IEA’s monthly oil market update reduced its global oil demand estimates for 2020 and 2021, the first decrease in several months, primarily driven by weakness in the aviation sector. Global oil output is growing once again as the U.S., Canada and Saudi Arabia lead the recovery in production. The report also predicts that refinery intake will lag the global demand recovery as inventory gluts limit their operational capacity.
The DOE’s weekly report was much more bullish than the monthly forecasts released this week, with U.S. petroleum consumption and refinery runs both recovering to their highest levels in the past five months, driving inventory draws across the board. In most years, we would expect to see gasoline demand and refinery runs peak for the season around this time, which will make the next few weekly reports particularly noteworthy to see if typical seasonality holds true in this most unusual of years. The report also showed the largest drop in U.S. refining capacity in over eight years, and more reductions are expected, as this data seems to only just now be reflecting the shuttering of the PES facility.
Yesterday we guessed that the partnership announced to convert a refinery in Bakersfield, California to produce renewable diesel would likely not be the last such plan announced. Sure enough, later in the day, P66 announced its plan to convert its San Francisco (Rodeo) refinery to a renewable facility. In just the past few months, we’ve seen fossil to renewable refinery announcements from Holly (Cheyenne, WY), Marathon (Martinez, CA and Dickinson, ND) Global Clean Energy (Bakersfield, CA) and now P66 (Rodeo, CA). This is in addition to numerous other Renewable production projects that were slated to come online in the next two years.
The announced shutdowns of several refineries seems to be contributing to a selloff in RIN values, with D6 values dropping a dime in the past 10 days. The EPA continues to be quiet on the RFS targets for 2021, and on the rumors swirling about plans for small refinery waivers.
Tropical Storm Josephine is expected to be named later today according to the NHC. While this will set yet another record for the pace of storms in a season, this system looks like it will stay out to sea and not threaten the U.S. coast.
Week 32 - US DOE Inventory Recap
A Strong Start And Weak Finish Sets The Stage
A strong start and weak finish Tuesday set the stage for a technical selloff in both energy and equity markets, as the recent bull rally seemed to run out of steam. Reversal bars on the daily charts after WTI flirted with a five-month-high and the S&P 500 came close to a new record high only to end lower on the day, suggested we may be due for a heavy round of selling. Instead, both asset classes are moving higher again to start Wednesday’s session, with bullish inventory figures seeming to help NYMEX futures erase yesterday’s losses and diminish the technical threat.
The API was said to report inventory draws across the board last week, with crude stocks down 4.4 million barrels, diesel down 2.9 million barrels and gasoline lower by 1.3 million barrels. The DOE’s weekly report will be out at its normal time this morning.
Any bullish sentiment from the weekly inventory data is being held in check by more bearish outlooks from the EIA and OPEC monthly reports.
OPEC’s monthly oil market report lowered expectations for global economic activity and oil demand, while increasing its forecast for supplies. OPEC’s production increased by nearly one million barrels/day on the month as the carte’s output cut agreements started to ease. The report also noted the lack of investment flows into the oil markets in recent months, while Gold and other commodities have seen record setting action.
The EIA’s Short term energy outlook painted an uncertain picture, as it has the past several months, and noted how July prices stagnated as the demand recovery battled to a stalemate with the threat of additional COVID shutdowns.
The August report used a smaller reduction in U.S. GDP than the July report, but despite that relative improvement, the forecast suggests that U.S. energy consumption in 2021 will still be lower than in 2019, as the COVID recovery is expected to stretch further into the future.
One notable item from the report is that the price curve for Oman crude flipped from backwardation to contango in the last two weeks of July, suggesting that Asian refinery runs – particularly in China – have slowed, while Middle Eastern production comes back online.
The latest in a long line of renewable diesel projects planned for 2022 was announced Tuesday as an alliance that will see ExxonMobil buying the output from the refinery in Bakersfield, CA that’s being retooled for RD production. This is at least the fourth traditional refinery being converted to RD production that’s been discussed in recent weeks, and given the state of environmental rules and weak refinery margins, it’s likely not going to be the last.
Controversial Negotiations Over Gas Regulations
Energy and equity prices are both moving higher for a second day, as apparent optimism over COVID counts, potential stimulus, tax breaks and other rumored economic policies seem to be outweighing negative sentiment over the latest escalation in U.S./China tensions.
While so far petroleum prices seem to be following macro factors, we’ll get a deluge of inventory data in short order to influence prices. In addition to the weekly inventory data, later today we’ll see the EIA’s Short Term Energy outlook, then we’ll get the IEA and OPEC monthly reports later in the week.
Even though WTI is close to reaching a five-month-high, refined product prices are still stuck in their neutral pattern for now. In order to break out of the sideways trend we’ll need to see ULSD and RBOB both break and hold above the $1.30 mark. RBOB will face an even earlier test with the 200-day moving average currently at $1.2730 – a level of resistance that repelled the upward momentum in gasoline prices half a dozen times in July.
It is an election year: After negotiations at the White House, the EPA is reportedly planning to rescind some rules on methane gas regulations that would have widespread impact on testing for oil & gas drilling and shipping operations. The move is sure to be highly controversial, as environmental concerns continue to become mainstream and it appears that some major oil companies will oppose the easing of restriction. This comes a week after the agency was also reportedly planning on recommending numerous small-refinery waivers to the RFS. That report helped send RINs sharply lower, but has not yet actually happened, the latest in a long line of White House/EPA negotiation rumors that hasn’t come to fruition.
The EIA this morning published a note highlighting the drop in LNG exports from the U.S. this year. The EPA’s rumored change to methane rules could further complicate this issue as foreign buyers may require certain clean-energy protocols in order to purchase U.S. exports.
Energy Futures Bounce Back After Weak Friday Finish
Energy futures are bouncing to start the week, after a weak Friday finish. The early buying seems to be aided by U.S. stock markets reaching their highest levels since the start of COVID, amidst a couple of optimistic demand-recovery headlines from China and Saudi Arabia.
Volatility for both energy and equity markets continues to drift lower, with the VIX and OVX indices reaching pre-COVID levels, as fear seems to have lost its grip on these markets. With so much uncertainty remaining on a variety of global issues, it’s hard to imagine this period of calm can last the rest of the year.
Baker Hughes reported four more oil rigs taken out of service last week, bringing the total U.S. drilling rig count to a new all-time low. Three of the four rigs taken offline last week came from the New Mexico side of the Permian basin.
Money managers continue to do relatively little in the petroleum arena, with only minor increases in NYMEX contracts and minor reductions in Brent seen last week. Open interest for Brent dropped to its lowest level of the year, but remains above its seasonal range, as that contract continues to find new global interest. Meanwhile, WTI is holding at the bottom of its five-year range, as the Cushing, OK hub slowly becomes less relevant.
We’re still a month away from the peak of the Atlantic Hurricane season, and several states are still recovering from widespread power outages caused by Isaias, and the NHC is giving 60 percent odds of another system forming into a named storm this week. The good news is this storm appears to be far enough south that the odds of it getting anywhere close to the U.S. are low.
Big Three Energy Benchmarks Close With Gains
It’s a quiet start this morning as the big three energy benchmarks look to close out the week with gains. Crude oil and diesel futures are down less than 0.5 percent this morning while RBOB is the only of the three to show green, but only just. It wouldn’t be a surprise if weekend excitement pushed the complex positive ahead of the settlement.
The disturbance off the mid-Atlantic coast has completely fallen off the proverbial and literal radar yesterday, only to be replaced with a new area of interest located west of the Cabo Verde Islands. It currently has a 10 percent chance of development in the next two days but the industry will continue to keep an eye out as it makes its way westward.
Today’s interesting read: the EIA breaks down COVID’s impact on jet fuel markets as average daily flights get cut by nearly 2/3.
It’s important to remember that the longer a security trades within a certain range, especially a constricting one, the tighter the spring may be coiling. If more positive economic numbers are published next week, in tandem with today’s surprise addition of 1.8 million jobs according to the BLS report, we could see a technical breakout that could finally close the gap set by panic selling back in March.
A Strong Rally Dwindles
What started out as a strong rally yesterday dwindled as we approached settlement, leaving gas and diesel futures with gains of less than a penny. Although the DOE reported a smaller draw in crude oil inventories than the API estimates, the 7.37 million barrel drop was not insignificant, bumping the American crude benchmark 50 cents to five month highs.
The EIA published an interesting note highlighting difference in the virus’s impact on gasoline and diesel demand. Gas took the harder hit back in March as stay-at-home orders came down across the nation while essential businesses, many of which require diesel to run, continued to operate.
The next 48 hours looks clear on the hurricane front. The tropical depression off the mid-Atlantic coast has 0% chance of development over the next few days and there are no new areas of interest so far today.
The Lebanon catastrophe continues to add layers as investigators and national leaders put the magnifying glass to the small country. Negligence, a Russian tanker, and even a petition for France to take control have all made an appearance in the saga’s latest installment. Right now it looks like impact to energy markets will be minimal as the situation unfolds.
Yesterday’s pullback from the large gains it boasted early was likely due to technical reasons. So far, it seems the complex will remain in its two-month long trading range and will require some strong fundamental changes or some buyers/sellers willing to push the chart pattern until it breaks. For today, it seems energy futures will continue upward with gas and diesel up half a cent and crude just positive.
Week 31 - US DOE Inventory Recap
Massive Explosion Amplifies Today's Rally
Crude oil futures are leading the pack higher today after the American Petroleum Institute published an estimated draw of over 8.5 million barrels yesterday afternoon. The API also showed a 1.7 million barrel drop in gasoline inventories, no doubt lending hope to buyers that demand is returning to the retail fuel market. The Department of Energy’s report is due out at its regular time today.
While the massive explosion in Lebanon’s capital seems to be taking some credit for today’s rally, the cause of the blast is still undetermined with some pointing to an uncanny chain of accidents involving fireworks and fertilizer. While instability in the region could have sparked panic-buying 10 years ago, today’s global oil glut provides significant cushion comfortable enough for most traders to hit snooze.
Hurricane Isaias hit the Northeast with some wind and rain but was a non-event for energy infrastructure in the area as it passed almost directly over the terminal and refinery grouping in New Jersey. There is another tropical disturbance in the mid-Atlantic region but not much is expected in the way of development as it has a 10 percent chance of organization over the next 48 hours.
Yesterday’s positive finish plus today’s strong rally could result in an upward break out of this summer’s trading range for refined product futures. Prompt month RBOB futures will need to clear the 1.29 level in order to break what looks like a rounding top chart formation. HO on the other hand is on the edge of covering the gap set back in March, setting multi-month highs. If it continues, we could see $1.40 for the distillate benchmark in short order.
Demand Fears Seem To Lurk Around Every Corner
After a strong bounce turned losses into gains Monday, energy prices are coming under modest selling pressure again to start Tuesday’s session. Demand fears seem to lurk around every corner as COVID case counts continue to climb and a large portion of the U.S. population has to grapple with a tropical storm.
Isaias made landfall as a Category 1 hurricane on the North Carolina coast overnight, and is bringing tropical storm conditions to most of the mid-Atlantic states as it moves inland up the I-95 corridor today. It would not be surprising to have issues at the Philadelphia-area or near NJ refineries due to heavy winds or power outages, as the storm is on a path to head right over most of the PADD 1 production facilities. That potential for damage likely contributed to Monday’s strong RBOB rally, although the risks of a supply disruption are lowered by the reduced run rates and ample inventories in the region. The potential impact on demand could be more widespread, although there too, with so many already working from home, the impact could be less than we would expect any other year.
While Monday’s RBOB rally certainly took some of the downward pressure off the contract near term, the weekly charts continue to show a rounding top pattern that threatens a move back below the $1 mark in the next couple of months. In order to break that pattern we’ll need to see RBOB rally above the $1.30 range. With just a few weeks left of the Summer-Grade futures contract, the clock is ticking for that rally to happen.
Today’s interesting read: This Bloomberg article that discovered a small trading shop that made big money when WTI prices went negative.
The EIA this morning took a closer look at the record-setting drop in U.S. oil production this spring as the worst of the COVID shutdowns took place. The report notes how production shut-ins nearly doubled previous records which were caused by hurricanes.
BP was the latest major oil company to announce huge losses for the second quarter, and laid out its strategy to “reinvent” the company with a focus on lower-carbon energy technology, and cut its dividend for the first time in more than a decade.
A Mixed Bag To Start The Week
It’s a mixed bag to start the week for energy prices with modest overnight losses turning to small gains for refined products while crude oil prices continue going nowhere.
While WTI and ULSD futures remain entrenched in their sideways trading pattern, RBOB gasoline futures are teetering on the edge of a breakdown that could send prices below the one dollar mark. With the summer driving season coming to an end, more questions than answers on the outlook for reopening this fall, and inventories holding near record high levels, it’s easy to make a fundamental argument for weaker gasoline prices as we start the RVP transition. That sets up an interesting test for early August trading, will RBOB’s weakness pull the rest of the petroleum contracts lower, or will gasoline avoid a collapse due to the strength in crude and diesel?
Right on cue, RBOB prices have bounced more than three cents from their overnight lows, although it’s unclear so far what’s driving that recovery. It could be some news in the past couple days of refinery closures, the storm heading up the eastern seaboard, or perhaps just a bit of bottom fishing after prices have reached their lowest levels in a month.
Marathon had several big news items to go along with its Q2 earnings report. The company announced it was indefinitely idling the Martinez, CA and Gallup, NM plants that had been closed due to COVID demand impacts, and had finally reached a deal to sell its Speedway retail chain to 7-11’s parent company. It’s worth noting that Marathon is considering transitioning the Martinez plant and its Dickinson, ND plant to renewable diesel facilities, similar to what Holly announced for its Cheyenne, WY facility recently.
In addition to those closures, several reports are confirming that Calcasieu Refining began idling its LA facility over the weekend due to the demand/margin impacts of COVID. Several of the Q2 earnings calls suggest the industry expects more of these closures to happen before the pandemic is past, but for now everyone is just guessing where the next one might be.
Hurricane Isaias has stayed far enough offshore as it moved up the east coast of Florida to spare that state from the worst of its damaging winds and storm surge, but now is expected to hit the Carolina's overnight and then dump large amounts of rain all along the east coast into New England. Given the major population centers now in the storm’s sites, this system could be a demand killer as even more drivers will stay at home for day or two as it passes. There’s another system the NHC is giving a 60 percent chance of formation this week, but so far that system is expected to stay out to sea and not hit the U.S.
After reporting the first increase in more than three months in last week’s report, Baker Hughes reported the U.S. oil rig count decreased by one in its latest release. The Permian basin saw its count drop by two rigs, while the Bakken saw a one rig increase, the first tick higher in that basin since January.
Money managers continue to be hesitant about petroleum contracts, making small reductions in WTI, Brent, RBOB and Gasoil net length, while ULSD saw a minor reduction in its net short position. Brent Open interest dropped nearly six percent on the week, as producers lowered their hedge positions to the lowest levels in more than four years. That reduction in producer shorts suggests that either the industry is willing to bet prices probably won’t fall from current levels, or that they don’t plan on producing as much in the near term.