Another Green Day For Energy Futures
It’s another green day for energy futures as prices continue to ride the bullish wave of OPEC cuts and the Phase-1 US/China trade deal. The move higher has been fairly small however (it took 2 full weeks to make up for just the Black Friday losses) which could mean traders are skeptical of the staying power of this rally, or simply that they’re focusing elsewhere as the holidays approach.
ULSD futures are starting to look particularly bullish with a trifecta of technical, fundamental and regulatory factors all favoring higher prices near term. If there’s any sort of major winter cold snap along the East Coast in the next few months, conditions are ripe for a 30+ cent price increase in short order. The first test on the charts looks to be the highs around $2.10 that were set in the wake of Iran’s attacks on Saudi oil infrastructure in September.
Gasoline prices are struggling to keep pace with the rest of the complex as we enter the seasonal demand slowdown, with US inventories at elevated levels, compared to distillate stocks that are at the bottom end of their seasonal range.
Values to ship gasoline on the main line of Colonial pipeline’s system rose to their highest levels in more than 3 years Monday as Gulf Coast basis values dropped to double digit discounts to RBOB futures amidst several refineries ramping up gasoline production. The loss of the PES refinery earlier this year along with the Tier 3 gasoline & IMO diesel spec changes for 2020 could make values along Colonial more consistently valuable vs recent years when they’ve spent the majority of their time in negative territory. As the chart below shows however, values for space along the line seem to be following a seasonal pattern, and won’t be a game changer unless they last into the spring.
The giant spending package working its way through congress is reported to include the $1/gallon biodiesel blenders credit retroactively from Jan 1 2018, through the end of 2022. If passed, that may well save numerous US biodiesel producers that were on the verge of insolvency without the credit, and give the industry a rare period of extended certainty after many years of having to wait for the credit to be reinstated retroactively.
The Dallas FED’s energy indicators report for December suggests that the slowdown in oil drilling has cost more than 8,000 job losses in TX this year, more than double the official federal estimate, as bankruptcies in the oil patch rose throughout the year. The report also notes that OPEC may have handed producers an early Christmas present with their output cuts that have propped up prices.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
Click here to download a PDF of today's TACenergy Market Talk