News & Views
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.
Week 47 - US DOE Inventory Recap
Oil And Diesel Prices Hitting Fresh 8 Month Highs
Oil and diesel prices are hitting fresh 8 month highs this morning and the big 4 petroleum futures contracts are now each up more than 30% from the lows set November 1st with a variety of technical and fundamental factors contributing to the surge.
The DJIA breaching 30,000 seems to be giving plenty of sentimental boost as investors are taking a risk-on stance, and there is clear technical momentum now that the top end of the long-lasting sideways trading range has finally broken.
Perhaps most notable on the charts is that ULSD futures finally filled the gap in their chart left behind during the March collapse. There’s still another 20 cents of upside for distillates to reach their March highs, but short term warning signals are suggesting the contract is overbought following an 8 day streak of gains, and due for a corrective pull back in the near future.
Expectations that OPEC & Friends will be forced to extend output cuts, and another missile strike on Saudi Arabian energy infrastructure are both getting credit for the fundamental reasoning for this rally. The good news is the Saudi facility suffered minimal damage from the missile that was reportedly able to travel more than 300 miles through the air, but was apparently unable to break through the outer wall of a diesel storage tank.
The API was said to show builds in crude oil and gasoline inventories last week of 3.8 and 1.3 million barrels respectively, while distillates drew by 1.8 million barrels. The builds in inventory were getting credit for a pause in the rally overnight, but seem to be ignored now that the buyers have stepped back in. The DOE/EIA’s weekly status report is due out at its normal time this morning.
An EIA note this morning shows US gasoline prices are holding near their lowest in 10 years heading into what is traditionally the busiest travel day of the year. The note also highlights the expected reductions in travel this Thanksgiving holiday by car (4%) air (48%) and mass transit (76%) due to COVID.
That huge difference between automobiles (which primarily run on gasoline) and other transportation methods (which rely heavy on various distillates) is one of many challenges refiners are facing as they attempt to shift output to match the unprecedented changes in demand this year.
Speaking of which, there was yet another refining casualty this week as Total announced it was halting operations the Donges refinery in Western France due to poor economic conditions. The shutdown is expected to last several months, but the plant is moving forward with a major upgrading project suggesting that it could return to service once demand gets back to normal.
NYMEX contracts will trade Thursday and Friday, but only Friday’s trading will have a settlement. Spot markets will not be assessed either day, so most rack prices will carry through from tonight to Monday.
Markets Cheer News Of New U.S. Treasury Secretary
Energy markets are on the cusp of a technical breakout to the upside with diesel prices hitting eight month highs, while crude and gasoline prices follow close behind.
Markets around the world seem to be cheering the news that Janet Yellen – the relatively market-friendly former FED Chair – is being tapped as the new U.S. Treasury Secretary. That move is seen by many as a sign that the new administration will be more focused on economic recovery than reform. In addition, reports that the Presidential transition is moving forward seems to be easing concerns over a protracted legal battle.
ULSD is trading higher for a seventh consecutive day, reaching a new eight month high and moving half way into the chart gap left behind during the March price collapse. WTI came within three cents of hitting an eight month high of its own overnight, setting up a critical test of the sideways trading pattern that’s contained the price action for June. There’s an interesting potential move on the WTI monthly chart, as the short lived selloff Sunday, November 1 and subsequent rally could make an outside up monthly bar that breaks both the low and the high ends of that sideways range. If prices can settle the month by breaking through the top end (near $44) there’s a strong case to be made that we’re soon going to see $50 crude.
Diverging diesel markets: Midwestern diesel spreads are collapsing this week after hitting their highest premiums in years as the annual post-harvest demand slump seems to be in full force across the region. Gulf coast values saw modest weakness in sympathy as the window to profitably ship barrels north has closed. West Coast values meanwhile are trading at double digit premiums to futures, with LA spots rebounding sharply from a mid-November slump, in what seems to be a reaction to a handful of unplanned refinery issues in the area.
The CFTC published a report on WTI’s plunge to negative values on April 20th. The report cites numerous fundamental and technical factors, and stops short of placing blame, and in many ways suggests the market performed as intended. The results are disappointing many who were looking for a smoking gun, and those that have a hard time understanding how complex commodity futures trading can be. One interesting point brought up in the report is the relatively high open interest in WTI in April, and the amount of positions held by “non-reportable” trading groups, meaning those with small enough positions they aren’t required to report to the CFTC. Those findings are consistent with earlier reports that suggested retail investors – many in China - were left holding the bag when they started trading in WTI without understanding how the contract really works.
NYMEX contracts will trade every day this week, although there will be no settlements published Thursday due to the Thanksgiving holiday in the U.S. Spot markets will not be assessed Thursday or Friday, so most rack prices will carry from Wednesday night through the weekend, even though futures will continue trading.
Slow And Steady Climb In Energy Markets
The slow and steady climb higher in energy markets continues Monday morning with diesel prices reaching their highest levels since March, while oil prices are trading at eight week highs. As has been the case for most days during the November rally, optimism driven by progress with COVID vaccines is getting credit for the strength.
A third COVID vaccine has proven to be effective according to reports, and this version produced by AstraZeneca is stable at refrigerator temperatures, which will help avoid some of the logistical hurdles faced by Pfizer’s vaccine.
Baker Hughes reported five fewer oil rigs working last week, snapping an eight week string of increases. The Permian basin continued to tick higher, adding two rigs last week, while the Cana Woodford (Oklahoma) basin decreased by two, Williston (North Dakota) lost one, and the “other” category that captures activity outside of the largest 14 basins, dropped by four.
Money managers appear more optimistic about energy prices, increasing their net length across the board last week. Brent contracts led the move with an increase of more than 50,000 total net contracts, split fairly evenly between new long bets, and closing out shorts. The moves in the other NYMEX and ICE contracts were much smaller, and the overall positions remain well below levels we were used to seeing in previous years. Speaking of which, the total open interest for WTI dropped to a new 4.5 year low last week.
That lack of interest could be explained by new contracts deliverable in the Houston market making the traditional Cushing, OK delivery point less relevant, but that’s not the whole story as Brent open interest continues to hold near two to three year lows. Those two data points combined suggest that the broader financial markets are less focused on oil these days, which could be a sign of the boring markets since June offering fewer opportunities for speculators, or the larger trend from financial institutions being pressured away from traditional fuel sources.
Speaking of which, the U.S. Treasury’s comptroller office submitted a proposed rule last week that would make it illegal for banks to exclude entire industries in their lending.
U.S. refiners are dealing with the devastating combination of poor demand, and poor public opinion forcing them to increasingly look to renewables as a way forward. One consequence of this rapidly changing landscape: a new report suggests that China may soon overtake the U.S. as the world’s largest petroleum refiner.
Cautious Push Higher Continues Today
The slow and cautious push higher continues today as diesel prices attempt to lead a push through the top end of the trading range that’s held the energy complex since June. ULSD futures are trading higher for a fifth straight day after reaching their highest settlement since July, but have still not yet been able to crack the $1.30 mark. Oil and gasoline prices have also been moving higher, but the moves over this entire week are less than what we would have expected in a single day last spring, and indicate the cautious nature of any optimism this year.
The correlation between daily moves in energy and equity prices has strengthened in the past few weeks as the markets have become fixated on the vaccine race versus the new shutdown orders amidst record COVID case counts. Ultimately, whether or not stocks can continue their recent march higher may determine if we see a breakout to the upside in energy futures, or if prices will fall back into their range yet again.
The move higher in ULSD over the past couple of weeks has helped diesel margins for refiners, but that’s largely been offset by weakness in gasoline, keeping the rough estimates of refinery profitability near breakeven levels. The forward curve looks better for the facilities that can weather this storm, although numerous reports suggest we’re likely to see more refinery closures in Europe and/or the U.S. before this is over. Asian refiners meanwhile seem to be doing well which creates a new shift in global logistics for crude and refined products that is expected to help tanker rates and ship operators.
A new bill known as the “Streamlining Advanced Biofuels Registrations Act” was proposed this week, in an attempt to force the EPA to consider applications for cellulosic biomass fuel producers. While this bill may have minimal if any impact on supplies near-term, it is a good reminder of why Georgia is looking like the most important state for fuel producers in 2021 as control of the Senate hangs in the balance. D4 RINs continue to hold near three-year highs around 90 cents/RIN, while D6 ethanol RINs have retreated in the past week, along with ethanol prices.
Energy Futures Tread Water
Energy futures are treading water to start Thursday’s trading with diesel and oil prices on the cusp of multi-month highs. So far buyers seem reluctant to keep pushing bids higher with warning signs for demand flashing around the country as shutdown orders continue to expand from coast to coast.
ULSD futures settled north of $1.26 for the first time in July, and are now threatening the $1.30 level that’s kept a lid on all rallies since March. If $1.30 breaks, next stop will be 1.38 which is where the diesel chart gapped during the price meltdown last spring when the first round of stay-at-home orders hammered prices.
It’s no coincidence this relative strength in diesel prices coincides with an improving supply/demand balance as yesterday’s DOE report showed total U.S. inventories returned to their five year seasonal range for the first time since April. The weekly demand estimate for diesel was actually slightly above the five year average for this time of year, and just 100,000 barrels/day below year-ago levels. Steeply backwardated diesel markets into December suggests that cash traders aren’t believing this strength can last through the holidays.
Basis values for distillates rallied in most regional markets Wednesday as the temporary tightness pushed up bids. Group 3 diffs were pushed to a multi-year high as inventories in the region reached a new eight year low. That rally was overshadowed by an even larger move by the notoriously volatile Chicago spot market, with rumors that the largest refiner in the area may soon be idling some units. The only cash markets not moving higher on the day were in Northern California and the PNW which had been trading at lofty premiums and started their seasonal return to reality.
While distillates are enjoy a resurgence, gasoline is staring at an ugly fundamental reality, as stocks look like they’ve started their annual build while demand faces the combination of the typical seasonal slowdown on top of a growing list of shutdown orders throughout the country. The DOE’s weekly gasoline demand estimate fell to a 22 week low last week, and evidence at the terminal level suggests we are likely to see more declines ahead. This diverging fundamental path for the two major refined products suggests refiners will be forced to make another shift in their production to favor distillates over gasoline, similar to what we saw in the spring.
Total refinery runs increased last week, led by a large move higher in the Gulf Coast. Ordinarily we’d expect refinery run rates to continue moving steadily higher through the end of the year, but with two shutdowns coming in November, and so much uncertainty surrounding demand this winter, it seems like we may be seeing U.S. run rates close to peaking until spring.
Week 46 - US DOE Inventory Recap
Daily Coronavirus Market Teeter-Totter
After trading lower for most of Tuesday’s session, energy futures staged a strong rally in the last 15 minutes of trading before settlement and that upward momentum has carried through to this morning, in spite of inventory builds in crude and gasoline last week. In the daily coronavirus market teeter-totter, longer term vaccine optimism is winning over short term shutdown concerns today after another positive finding on Pfizer’s experimental drug.
The API reported a large build in crude stocks of 4.1 million barrels last week, while gasoline stocks increased slightly by 256,000 barrels. Distillates meanwhile had a large decrease of five million barrels on the week, consistent with the evidence we’re seeing in numerous markets in the Midwest, Rockies and South West that diesel supplies have suddenly become tight.
This situation feels similar to what we saw with the first round of shutdowns in the spring where gasoline demand reacted faster, and distillates were strong for another month or so, but then gasoline consumption recovered much faster. The DOE’s weekly report is due out at its normal time this morning, but it will likely take another week or two for the impact of the latest closures to show up in the nationwide data.
Another COVID refinery casualty? BP filed notice with Illinois and Chicago officials of possible layoffs exceeding the reporting threshold of 250 salaried employees. It’s unclear at this point if these layoffs might impact the office operations in Chicago or Naperville, IL, or if they could mean that some unit(s) could be closed at the Whiting, IN refinery, the largest production facility in PADD 2, and the sixth largest in the country.
Not done yet? After hurricane Iota became the second major hurricane pound central America in two weeks, the NHC is tracking two more potential storm systems today. The good news is both systems are given low (20%) odds of developing in the next five days. The bad news is several hurricanes in the parade of storms that ended up hitting the U.S. already this year started in similar fashion, so we’ll be stuck watching weather right through the end of the official hurricane season November 30 and probably beyond.
This hurricane season set records for the number of storms to form in the Atlantic basin, and the number of storms to hit the U.S. Coast. The EIA this morning highlighted the impact on Gulf of Mexico oil production, which dropped by the most in 12 years due to these storms. Numerous refineries were also shut down, some more than once, due to the parade of storms, and yet prices barely flinched due to the weak demand situation.
Shutdown Pessimism Outweighs Vaccine Optimism
Energy and equity markets are giving back most of Monday’s gains in the early going Tuesday as shutdown pessimism seems to be outweighing vaccine optimism today.
New state-wide restrictions are popping up from coast to coast just ahead of one of the busiest travel weeks of the year, which will certainly put some more downward pressure on fuel demand, although the extent remains to be seen.
After being the weak link in the energy chain for months, distillates have had a strong performance this fall as inventories in several regions dropped to normal levels thanks to a slow recovery in demand and plummeting output from refiners. We can see evidence of that dramatic change in the chart of Midwestern diesel stocks below that shows inventories going from all-time highs in August, to an eight-year-low today. The annual harvest demand peak, and a pull from neighboring states to the West seem to be the major contributors to that rapid drawdown, with W. Texas, New Mexico, Arizona, Colorado and Nevada all finding themselves suddenly short on diesel supply. Cash markets suggest this will be a short-lived phenomenon with steep backwardation into December foreshadowing a recovery in supplies, and the seasonal demand drop, both coming soon.
Reuters is reporting that documents leaked from OPEC’s technical committee make the case for another three to six month extension of the current output cuts. We should find out two weeks from today if that plan is adopted by the cartel.
See this note for a listing of all the refinery closures/conversions announced around the world so far, which total roughly 1.7 million barrels/day of capacity. The exception to the current refining rule of weak margins appears to be China, as the country’s plants reached another output record in October amidst healthy domestic demand.
U.S. refiners are not so lucky, and are facing yet another new challenge as the ordered shut down of Enbridge’s line 5 puts more plants in MI and OH at an even greater risk of being unable to operate economically, although it could be a life saver for other refiners in the mid-continent who have the logistics in place to make a home for that newly distressed crude oil coming from western Canada.
The line 5 saga is just one of several pieces of political theater impacting energy markets since the election. RIN values had been on a tear since the renewable friendly Presidential victory was called, but D6 values have pulled back sharply this week after the EPA administrator said RIN values were “out of control” and that the agency would not release RVO targets for 2021 by the Nov. 30 deadline.
In addition, nominations for drilling in ANWR have been opened up, leaving just enough time for potential leases to be signed before the presidential inauguration. The flurry of events in the past few days suggests we are likely to see more moves from the democratically warring factions in the weeks ahead.
Major Trade Deal Has Markets Rallying
More good vaccine news and a major trade deal have markets around the world rallying this morning, with energy futures adding 3-4% in the early going.
Moderna announced its COVID-19 vaccine is 94% effective, which coupled with last week’s Pfizer vaccine announcement suggests that widespread rollouts could come sooner than many had expected.
The largest trade deal in history that covers roughly 30% of global GDP is also getting some credit for the early buying in equity and energy markets this morning, although the direct impact on supply/demand fundamentals appears to be limited. The lack of U.S. participation in the deal is noteworthy, and as this WSJ article notes, the President-elect’s expected foreign policy changes could have the most short term impact on oil producers in the next two years.
Ongoing talks that OPEC & Friends will extend output cuts continue to make the rounds every time prices move higher as headline writers struggle to explain the price moves. There is a monitoring committee meeting this week, which doesn’t decide policy, and then a policy meeting in two weeks. Even if an extension of current cuts is agreed to, OPEC’s output is likely to continue increasing as Libyan production is coming back online, and they’re exempt from the agreement.
10 more oil rigs were put to work last week according to Baker Hughes. That marks the eighth consecutive weekly increase in oil drilling activity after the rig count reached a record low. The Permian basin accounted for 7 of the 10 rigs added last week, and 30 of the 53 total rigs added during this 8 week stretch.
The CFTC’s weekly commitments of traders report will be released later today (delayed from Friday due to Veteran’s Day). The ICE version of that report showed a sizeable increase in net length held by money managers (aka hedge funds) driven mainly by short covering. This weekly data is collected as of Tuesday, so it’s not surprising to see that type of reduction in short bets after the big rally we saw in the first two days of last week, and it would seem we may see similar moves from the NYMEX contracts when that data is released.
Iota is a major hurricane heading towards central America, but unlike Eta, is not expected to turn back to the north and threaten the U.S. after making landfall. There are no other systems currently being tracked in the Atlantic basin, with just two more weeks left in the busiest season on record.
Rally Runs Out Of Steam
The rally seems to have run out of steam as energy prices pull back for a third straight day after threatening eight month highs earlier in the week. Futures are still set to have strong gains on the week despite the pullback, thanks to the big gains during the vaccine euphoria Monday and Tuesday. Cash markets meanwhile are flashing more warning signs as basis values have pulled back sharply in several regions, adding to the downward pressure from the futures selling the past few days.
The build in crude stocks reported by the DOE is getting credit for the pullback, especially compared to the API’s estimate that crude stocks had a large drawdown earlier in the week. The timing of the selling didn’t match however as prices barely flinched following the DOE report, but melted down in the minutes leading up to the close, and continued through the overnight hours. In addition, the demand estimates reported by the DOE were all higher on the week and product inventories continued to draw, suggesting the move lower in prices has more to do with technical and lost momentum than it does with a change in any fundamentals.
The NHC gives 90% odds that Iota will form over the weekend in the Caribbean. Once the storm system gets organized we will then get to see which direction the models suggest it may head. The U.S. Gulf Coast has been a storm magnet this year, so don’t be surprised if we’re looking at yet another landfall sometime before this record setting Atlantic Hurricane season officially closes 11/30.
Week 45 - US DOE Inventory Recap
Ceiling On Energy Prices Remains Intact
The ceiling on energy prices is intact for now and futures are slipping after failing to break through to the upside on Wednesday. A pair of negative monthly reports from OPEC and the IEA are getting credit for the pullback, while technicians will tell you this type of selling is normal when chart resistance repels a rally. The drop in prices after a dramatic November rally has been minor (and as this is being written WTI has moved back into positive territory) suggesting we are likely to see another test of that price ceiling again in the near future.
OPEC’s monthly report reduced its demand outlook as consumption in the America’s was below expectations and new COVID-containment measures in Europe are reducing transportation. In addition to the worsening demand outlook, the OPEC report showed the cartel’s output increased in October as Libyan production (which is exempt from the output cut agreement) started to come back online. What could be worse is that Libyan output increased to 454,000 barrels/day in October, and is expected to reach one million barrels/day in November, putting more pressure on the market.
There has been concern that the regime change in the U.S. may mean more Iranian oil comes back to the world market just in time for no one to need it, further adding to the bleak fundamental outlook. Not so fast, according to a new IAEA report, Iran’s enriched uranium stockpile is 12 times the agreed upon amount, making the removal of sanctions much more complicated, and making it less likely that the world will smile upon a new deal this year.
The IEA’s monthly oil report shows a similar pattern as OPEC with demand expectations slipping while supply increases. The IEA’s report also threw some cold water on the vaccine optimism that swept global markets earlier in the week suggesting there will not be a significant impact in the first half of 2021. The count of global refinery permanent shutdowns stands at 1.7 million barrels/day, but “Significant structural overcapacity” remains with approximately 20 million barrels/day of temporarily idled distillation capacity worldwide, suggesting more closures are coming.
Right on cue, Scotland’s lone refinery announced that two units idled due to the drop in demand this year will be shuttered permanently.
Eta made a second landfall in Florida north of Tampa this morning, as a tropical storm with sustained winds around 50 mph and is moving across the state, heading for Jacksonville this afternoon before reemerging in the Atlantic. The storm’s path and relative lack of strength means it should not disrupt port traffic for long. The tropical wave churning in the Caribbean now has 90% odds of being named, and we should know early next week if it will be yet another Gulf Coast threat.
Top End Of Trading Range Tested
WTI and ULSD futures came close to reaching eight month highs overnight before sellers stepped in, cutting back the gains nearly in half for the day in the past couple of hours. This test of the top end of the trading range that’s held prices since June should be pivotal for price action through the end of year that can’t seem to end fast enough.
Bullish supply data from the API and DOE are getting credit for the early strength, adding to the rally built earlier this week on hopes of a demand recovery once the new vaccine can put COVID economic destruction in the rear-view-mirror.
If the top side of the trading range breaks, there’s an easy 10-20 cents of upside potential for refined products, and we could see WTI pushing towards $50/ barrel in short order. If the chart resistance can continue to repel this rally however, we may be due for another pullback and an extension of the sideways trading.
The API reported large inventory draws across the board last week with oil stocks down 5.1 million barrels, diesel down 5.6 million barrels and gasoline stocks down 3.3 million barrels. The DOE weekly report will be released tomorrow since the U.S. is celebrating Veteran’s Day today. OPEC’s monthly report is due out later this morning, and the IEA’s monthly report will be released tomorrow.
The DOE/EIA’s monthly Short Term Energy Outlook had much more of the same uncertainty surrounding COVID and its impact on fuel demand and prices. The government’s energy reporting agency (via the company it hires to provide forecasting, that also sells pricing subscription services) was forecasting that Brent crude prices will hover around $40 for the remainder of this year before averaging $47 next year, which suggests the report was written prior to Monday’s vaccine announcement which has Brent already close to $45. One interesting and unusual item noted in this month’s report was the extraordinary put-call ratio in RBOB gasoline for next spring, suggesting that perhaps…“market participants are hedging against a potential continuation of economic effects of COVID-19 into the 2021 summer driving season.”
The report also highlights a big drawdown in distillate inventories, which had their largest monthly decline in nearly a decade. A combination of factors such as refinery downtime both planned for fall turnarounds and unplanned due to storms, along with a higher than normal starting balance and sharp recovery in demand all contributed to those inventory declines. While several regional markets in the Western half of the country are seeing tight rack supplies of diesel as a result of this, overall refinery margins have not yet recovered much and remain at about half of the levels we came to expect pre-COVID.
Eta regained hurricane strength this morning, but its forecasted path has shifted back to the east, and it’s now expected to make landfall north of Tampa tomorrow afternoon. The shift keeps the storm away from oil production and refining assets in the gulf coast, and given its relative lack of strength, it should not be a major supply disrupter, although Tampa Bay port operations may be delayed for a couple of days. The new path also gives the storm yet another chance to reform over open water as it should reach the Atlantic sometime Friday.
Meanwhile, the 30th named storm of the season now has 80% odds of developing in the Caribbean in the next five days.
Pullback In Prices After Euphoric Monday Gains
Energy prices are moving higher for a second day, but are trading below where they were this time yesterday when the runaway vaccine rally was in full force. The pullback in prices Monday afternoon seemed to follow the lead of U.S. equity markets that gave back most of their euphoric gains from early Monday morning, as the reality of logistics and timing with the new vaccine started to set in. The high water marks from the early run up set the near-term resistance layers that will determine if we see a strong November rally in prices, or just a return to the sideways shuffle that’s been going on since June.
Physical gasoline markets were less enthusiastic Monday, with basis values across most U.S. spot markets sliding and offsetting some of the big gains in RBOB futures. The reality seems to be that the seasonal demand slowdown is already upon us, and any pickup in demand from a vaccine isn’t likely to start until next year.
Physical diesel markets on the other hand continued to see stronger basis values that sent cash prices in most markets to their highest levels since August, while West Coast values reached their highest levels since March. Midwestern basis continues to strengthen – Group 3 prompt bases values reached their highest levels in more than a year – as the end of a strong harvest season has helped inventories decline rapidly.
Tropical Storm Eta is back over open water in the Gulf of Mexico after lashing south Florida with heavy rain over the weekend. The latest forecasts have it heading towards the Florida Panhandle this weekend, but AL, MS an Eastern LA are still in the forecast cone, which brings several refineries into its potential path. The good news is that even though this storm could again reach hurricane strength over open water this week, it’s expected to lose strength as it approaches land for the fourth time in its long and winding path. With winds dropping into the 35 mph range there should be minimal damage, but heavy rains and power outages will still be a concern.
Tropical Storm Theta set the all-time record for named storms in a single season at 29 when it formed in the open Atlantic overnight. That storm is heading east towards Portugal and will not threaten the U.S.
Meanwhile, another tropical wave is given 70% odds of developing into the 30th named storm of the year over the next five days. As we have seen already this year with hurricanes Delta, Zeta and Eta, the warm Caribbean waters can spark rapid development once these storm systems get organized.
RIN values continue to rally, with both D4 and D6 values pulling near three-year highs as the expected administration change looks more friendly to renewables than refiners. Specifically it’s expected that the new EPA administers are less likely to push small refiner exemptions, meaning more demand for RINs (assuming those small refiners aren’t forced to close their doors).
The latest in the rapidly changed refinery landscape: Shell announced more capacity reductions at its facilities in Singapore. Delek laid off workers and is deferring maintenance work at its Krotz Spring plant to 2021, and BP announced a new hydrogen project at the Lingen refinery in Germany. That project aims to produce hydrogen from water using electrolysis, and replace some of the natural gas based hydrogen that’s produced at the plant currently.
Markets Spike Following Reports of 90% Effective COVID Vaccine
Reports of a “90% effective” COVID vaccine have equity and energy markets spiking this morning, with the DJIA and S&P500 both poised to break all-time highs following the news. Energy futures were already moving 2-3 cents higher overnight as the market was considering the impacts a new U.S. president will have on prices, and then surged another 5-6 cents around 6 a.m. when the vaccine news broke.
The spike is breaking the downward sloping trend-lines on the weekly charts for WTI, ULSD and RBOB, with product prices now 22 cents higher than they were during the overnight selloff November 1. The dramatic reversal sets up a test of the top-end of the summer trading range, which looks like it will be a major technical pivot point to determine if prices continue their sideways action or if we see another 20-30% rally in the coming months.
At some point, it seems we’ll probably get a pullback once it sinks in that there is still a long hard winter ahead of us with COVID case counts soaring around the country and around the world, while this vaccine will still need months to develop and then even more time to produce and distribute.
The companies that have been putting oil rigs back to work over the past several weeks must be feeling better about their decision this morning as WTI has added more than 10% to its value so far today. Baker Hughes reported five more rigs were added last week, the seventh consecutive increase, with the Permian basin accounting for the entire move this week.
Money managers on the other hand are probably wishing they had a do-over as they slashed bets on higher prices across the board last week, just in time to miss out on the best rally in the past five months. Earlier this year, Saudi Arabia’s energy minister threatened oil price speculators, and already seems to be holding to that promise, suggesting tweaks to its output cut plans after the widespread selling by large speculative traders last week.
A few interesting reads on how the new President may impact energy markets:
Law360: Biden’s win puts clean energy center stage.
Refinery Plant Announces Plan For Shut Down
Energy and equity markets are slipping modestly lower to start Friday’s session, moving back into a holding pattern after a strong rally as the world continues to wait and see how the U.S. elections will play out.
While it’s been a strong showing this week for petroleum contracts, especially after they were on the edge of a major collapse Sunday night, WTI and RBOB contracts still have lower lows and lower highs on their weekly charts, meaning the downward sloping trends are still in place, and that there’s a good chance we are due for more technical selling pressure. Fundamentally, it seems like we’re due to see more selling as long as rising COVID cases keep fuel demand in check.
Yesterday in this update we said…we’re just waiting to see which [refinery] plant will be next to announce it plans on shutting down for good. We didn’t have to wait long as a few hours later Shell announced it would be shutting down the 260mb/day refinery in Convent, LA after efforts to sell that facility were unsuccessful. The table below shows that roughly 7% of the country’s refining capacity is now either shuttered indefinitely or planning to shut down/convert to renewable production. That’s more capacity coming offline in the past five months than we’ve seen in the past 30 years.
After dumping two feet of rain on parts of central America, Eta has moved back over water and could regain hurricane strength over the weekend. The current path has the storm hitting the Florida keys Sunday and Monday, and then most models have it ending up in the Gulf of Mexico next week. Since the market has been able to largely shrug off the half dozen storms that have already hit the heart of Hurricane country so far this year, it seems unlikely this will be a major disrupter unless it strengthens back into a major hurricane and heads towards Houston.
RIN prices rallied to fresh 2.5 year highs Thursday as prospects for a new U.S. President improved. While a divided congress would limit the ability to make legislative changes, the new President would be likely to come with a changing of the guard at the EPA, which would surely be less likely to approve small refinery waivers to the RFS, and thereby force more demand for RINs. This Bloomberg note highlights thoughts from energy CEO’s on other areas where the industry could see changes in the next year as a result of the election.
Energy Futures Cooling Their Heels 11-5-2020
After a strong 3-day recovery rally that’s added 14% or more to most contracts from Sunday night’s lows, energy futures are cooling their heels this morning with minor losses in the early going as the market appears to have moved back into wait and see mode.
While energy prices have stalled out, equity markets continue to rally even though the outcome of the US Presidential election remains in doubt. It seems that the rational for the push higher is that odds look favorable for a split congress, meaning that whoever wins the Presidential race will be limited in their capacity to make major changes. For a good quick read on the potential supply/demand impacts of the Presidential election, see this report from Rystad Energy.
Eta continues to churn over central America, and is expected to reform over the Caribbean this weekend, and Florida is still in the storm’s path for early next week. The forecast path has added a left turn in the past 24 hours, which could mean the storm will get into the Gulf of Mexico. Current models suggest a Florida panhandle landfall if that happens, which will keep the storm East of most energy supply infrastructure.
The silver lining of COVID & Hurricanes: While we’ll need to watch Eta for a few more days to make sure it doesn’t take another ominous turn, the reality is that even if it does hit oil production and refining operations (like Laura, Sally, Delta & Zeta did) the reduced demand in the country this year means most people won’t notice any issues with fuel supplies or prices.
Yesterday’s DOE report provided more evidence for that phenomenon as demand continues to struggle through the fall, and requiring sharp pullbacks in both oil output and refining operations just to keep inventories at manageable levels. Ordinarily this time of year we’d expect refiners to be ramping up rates as they emerge from fall turnarounds, but this year instead we’re just waiting to see which plant will be next to announce it plans on shutting down for good.
The FOMC will be making another monetary policy announcement this afternoon, but nobody seems to care since the FED has already signaled it will be a long time before they consider raising rates again.
Week 44 - US DOE Inventory Recap
World Anxiously Awaits U.S. Election Results
Energy prices are moving higher for a third straight day as the world anxiously awaits results of the U.S. elections.
After moving higher in the evening, energy and equity futures both saw a slump overnight after it became clear that a clear winner in the U.S. Presidential race would not be named immediately, and the suggestion that the Supreme Court would need to get involved seemed to temporarily spook the markets. After roughly two hours of trading in the red, both asset classes were able to climb back higher in the early morning hours. We could see more similar swings throughout the day as the headlines of vote tallies continue to roll in.
While the momentum has clearly shifted near-term after prices survived a big selloff Sunday night, weekly and monthly charts continue to show a downward sloping trend, that favors lower prices this winter unless WTI can claw back above the $40 mark this week.
The API reported a large draw in oil inventories of eight million barrels last week, which helped oil and product prices keep their upward momentum Tuesday evening. Gasoline inventories built by 2.4 million barrels, while distillates had a small decline of 577,000 barrels. The DOE’s weekly report is due out at its normal time this morning.
Hurricane Eta is moving over Central America, and is now expected to hit Florida early next week. Forecasts suggest that it will be a tropical storm when it reaches the state, but based on what we’ve seen with storms over the Caribbean blowing up rapidly this year, don’t be surprised if that changes this weekend. The current path keeps the storm well to the south and east of oil platforms and refineries, so this should be a non-event for fuel supplies beyond some possible temporary closures at Florida ports.
The EIA this morning highlighted the shift in energy flows between the U.S. and Mexico over the past decade. Oil flows from Mexico have tumbled as Pemex struggles with corruption and ineptitude, while U.S. exports of refined products have soared while Mexican refineries run well below capacity. While these flows have become a more important outlet for U.S. refiners, new policies being discussed south of the border to reinvigorate Pemex have the potential to slow the flow of gasoline and diesel in the coming years.
Energy Prices Score Big Technical Victory
Energy prices have scored a big technical victory so far this week, rallying more than 10% after reaching five month lows Sunday night, salvaging the sideways trading range that’s going on its sixth month. Some see this bounce as a sign of a major market bottom that will propel prices another 10-20% higher in the coming weeks, while others are shrugging it off as a dead cat bounce that just delays the inevitable drop as demand looks to be sliding as new shutdowns spread in the U.S. and Europe.
Taking some of the credit for the move today, Russia is said to be in talks domestically and with OPEC about a three month extension of production cuts, after saying for weeks they would open production back up despite the new lockdowns hitting Europe. The EIA this morning noted that OPEC’s oil revenues are expected to plummet to an 18 year low this year, as voluntary production cuts led by Saudi Arabia, combined with involuntary production cuts in Libya, Iran and Venezuela, multiplied by low prices hampered the cartel’s earnings.
U.S. equity markets also seem to be helping energy futures find a bid, moving sharply higher for a second day as the election winds down. We’ll know this time tomorrow whether or not there will be a clear outcome, and expect a bumpy ride for both equity and energy prices if it’s not.
While the East Coast has been grabbing most of the headlines, West Coast basis values have shot higher in the past week thanks to a rash of unplanned refinery issues. CARB #2 diesel values have reached an eight month high during the rally, while CARBOB gasoline values reached a two-month high. Looking back however, you can see this latest jump in LA Spot values pales in comparison to the chaos we’ve been accustomed to in previous years, another sign of how the COVID-demand slump is acting as a price buffer when supply disruptions happen.
Consolidation continues: St. Louis-based Bunge agreed to sell its Rotterdam refinery to Neste, but will continue to lease back the facility for the next three years. Starting in 2024, Neste will control operations at the plant – which is adjacent to its current refinery and already has a pipeline connection between the facilities.
Zombie storm: Hurricane Eta is a major Category 4 storm about to release devastating storm surge and rain on central America today, and then is expected to return to the Caribbean and regain tropical storm strength over the weekend. Given the warm waters in that region, and the path, it looks like Florida could end up taking a hit next week before this storm is done. Given everything else that’s happened this year, I wouldn’t rule it out.
Volatile Week Of Trading
A volatile week of trading was expected as the world anxiously awaits the U.S. election, and the early results have not disappointed.
WTI just turned positive after being down $2/barrel overnight, and refined products are trading a nickel above the lows set in the first 10 minutes of Sunday night’s session. Stronger equity markets, credited to a Chinese manufacturing report reaching a 10 year high, seem to be helping prices look past the risk of more COVID lockdowns for now.
The 5% bounce sets a good short term layer of technical support at the overnight lows $33.64 for WTI, $.97 for RBOB and $1.02 for ULSD. That support may be tested again as longer term charts continue to favor another move lower, and likely a longer-lasting move below $1 for refined products.
Marathon reported a $1 billion loss for the third quarter this morning, with its refining and marketing segment losing more than $1.5 billion (compared to earnings of nearly $1 billion a year ago) which was partially offset by strong earnings in its mid-stream operations. The results also included $433 million in impairment expenses primarily due to “repositioning the Martinez refinery” and $348 million in restructuring expenses related to idling two refineries and their workforce reduction. The sale of Speedway is still on track for Q1 2021, and renewable diesel production is starting at its Dickinson, ND facility.
Baker Hughes reported 10 more oil rigs were put to work last week, a sixth consecutive weekly gain. Nine rigs were added in the Permian basin, and one was added in the Eagle Ford. With the recent selloff in prices, it seems like we might see the recovery stall out over the next month or so as operations catch up with prices.
Money managers continue to seem unenthusiastic about energy contracts. The large-speculative category of trader made small reductions in the length held in WTI and RBOB positions last week, made a small increase in the short position in ULSD, and a small increase in Brent length. Open Interest in Brent dropped to its lowest in two years.
Hurricane Eta formed in the Caribbean over the weekend, continuing 2020’s record setting storm streak. This hurricane is not a threat to the U.S. however as it is expected to make landfall in Nicaragua Tuesday.