Biggest Storm Threat To New Orleans Since Hurricane Katrina Emerges
Energy prices are seeing a strong rally for a second day as a major hurricane targets refining country, which could be the biggest storm threat to New Orleans since Hurricane Katrina. Hurricane Delta is the 25th named storm of the season, and will be the 10th named storm to make landfall in the U.S. in a single season, both of which are breaking records set in 2005, the year Katrina, Rita and Wilma devastated parts of the country.
RBOB gasoline futures are leading the charge higher, already up more than 10 cents so far this week, as nearly four million barrels/day of refining capacity - more than 20% of the country’s total - is in the forecast cone for this storm, and essentially all of the NOLA area refineries clustered along the Mississippi River look like they’ll be on the more dangerous east side of its path. See the table below for the refineries at risk. If RBOB can break technical resistance around $1.25 this week, there’s room on the charts for a run at the Hurricane Laura highs of $1.40. Considering we’re already in winter-RVP grades of fuel and expecting the seasonal demand slowdown however, it seems like a long shot for gas prices to sustain that type of rally.
The outlook for Delta is much more dangerous as it rapidly intensified from a disorganized storm to a hurricane yesterday, and is now expected to become a major Category 4 storm in the next couple of days with winds expected to exceed 130 mph before weakening as it approaches land on Saturday. We’ve already seen numerous examples of forecast models underestimating the strength of these systems (including with this storm just yesterday) so don’t be surprised if it reaches Category 5 – the highest level on the scale - as it makes its way across the Gulf of Mexico. For consumers, the good news is that roughly ¼ of the refinery capacity in the path of the storm has already been shut in or is running at reduced rates, either due to COVID-related demand destruction, or the impacts of Hurricanes Laura or Sally earlier in the year, which should mean less potential impact on prices. In addition, as long as the Houston and Port Arthur hubs aren’t impacted directly, there’s less risk of any shutdowns of the major pipeline systems feeding the East Coast and mid-continent markets.
You’ll see plenty of reports that Gulf of Mexico oil rigs are being shut in ahead of this storm, but with ample inventories and sluggish demand, it’s unlikely those precautionary shut downs will have a long term impact on oil prices.
Diesel prices are lagging the run-up in gasoline prices as distillate inventories remain near record-highs while gasoline stocks have returned to normal seasonal levels. Outside of the annual harvest demand spike happening across the Midwest, the outlook for diesel demand remains sluggish with mass transit and trucking activity looking like it will take years to recover. From a technical perspective, ULSD futures are facing short term resistance at the $1.17 mark this week, and if they break through that level, look like they’ll make a run at $1.25.
Click here to download a PDF of today's TACenergy Market Talk.
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The Struggle For Renewable Producers Continues As A Rapid Influx Of Supply And Crashing Credit Prices Make Biodiesel
The sigh of relief selloff continues in energy markets Tuesday morning, with gasoline prices now down more than 20 cents in 7 sessions, while diesel prices have dropped 26 cents in the past 12. Crude oil prices are within a few pennies of reaching a 1 month low as a lack of headlines from the world’s hot spots allows some reflection into the state of the world’s spare capacity for both oil and refined products.
Gasoline prices are trading near a 6-week low this morning, but still need to fall about another nickel in order to break the weekly trendline that pushed prices steadily higher since December. If that trend breaks, it will be safer to say that we saw the end of the spring gasoline rally on April 12th for the 2nd year in a row. Last year RBOB futures peaked on April 12 at $2.8943 and bottomed out on May 4th at $2.2500. The high (at this point) for this year was set on April 12th at $2.8516, and the low overnight was $2.6454.
It’s not just energy commodities that are seeing an unwind of the “flight to safety” trade: Gold prices had their biggest selloff in 2 years Monday and continue to point lower today. Just how much money poured into commodities in the weeks leading up to the direct confrontation between Israel and Iran is unclear, but we have seen in year’s past that these unwind-events can create a snowball effect as traders can be forced to sell to cover their margin calls.
Supply > Demand: The EIA this morning highlighted the record setting demand for natural gas in the US last year, which was not nearly enough to offset the glut of supply that forced prices to a record low in February. A shortage of natural gas in Europe was a key driver of the chaotic markets that smashed just about every record in 2022, and an excess of natural gas supply in Europe and the US this year is acting as a buffer, particularly on diesel prices.
The struggle for renewable producers continues as a rapid influx of supply and crashing credit prices make Biodiesel, RD and SAF unprofitable for many. In addition to the plant closures announced in the past 6 months, Vertex Energy reported Monday it’s operating its Renewable Diesel facility in Mobile AL at just 50% of capacity in Q1. The truly scary part for many is that the $1/gallon Blender's tax credit ends this year and is being replaced by the “Clean” Fuel production credit that forces producers to prove their emissions reductions in order to qualify for an increased subsidy. It’s impossible to say at this point how much the net reduction will be for domestic producers, but importers will get nothing, and at current CI values, many biodiesel producers may see their “blend credit” cut by more than half.
Click here to download a PDF of today's TACenergy Market Talk.
After Years Of Backwardation, Diesel Prices Have Slipped Into Contango Over The Past Week
The pullback continues for energy prices as violence in the Middle East looks like it won’t rapidly expand, and financial markets continue to struggle with a higher-for-longer interest rate reality.
After years of backwardation, diesel prices have slipped into contango over the past week, despite multiple canal disruption concerns of reduced exports coming out of Russia. A Reuters article highlights how sluggish demand in Europe, and a glut of Asian supply [thanks to the rapid influx of new refining capacity over the past 2 years] is contributing to the changing market structure. This sudden weakness in diesel is also leading many refiners to reconsider their max-diesel output stance that had been key to their record setting margins in 2022 and 2023.
Money managers were reducing their bets on higher energy prices last week, in what appears to be an unwind of the positions added the prior week when it seemed like we might have an all-out war between Israel and Iran. The exception to the reduction in speculative length was the Brent crude oil contract which saw its money manager positions increase for a 4th week to reach a 3-year high. Open interest in crude oil contracts is also increasing to multi-year highs as new money flows into the energy space as a hedge of both inflation and geopolitical concerns, which could contribute to a tick higher in volatility if the sell-off continues this week as the bandwagon jumpers may soon be looking for a new ride.
Baker Hughes reported a net increase of 5 oil rigs drilling in the US last week, while natural gas rigs dropped by 2 on the week to a fresh 2 year low. The Permian basin has quietly added 8 more rigs in the past 4 weeks as producers in that region try to find a way around the shipping bottlenecks to get their otherwise profitable production to market. An RBN note last week highlighted how the lack of natural gas pipeline capacity will limit crude oil production capacity in the basin, and Kinder Morgan highlighted the need for another pipe in its latest earnings call.
Valero reported an upset at its Corpus Christi West refinery Saturday, although it appears that the brief flaring didn’t reduce operational levels.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
Click here to download a PDF of today's TACenergy Market Talk.