Energy Futures Are Seeing A Modest Pullback This Morning After 2 Strong Days Of Gains

Energy futures are seeing a modest pullback this morning after 2 strong days of gains. The buying spree seemed to stall out Monday afternoon, and left ULSD and RBOB futures hovering near their weekly trend-lines, but so far lacking the conviction to make a break-out to the upside and put an end to the bearish patterns that have been in place since the summer. 

Many headlines are suggesting the reason for the recent recovery is expectations that OPEC and Friends will extend their output cuts at their meeting on Sunday. The IEA this morning suggested that even if the cartel extends cuts, the world is likely to still see a supply surplus next year. 

More than a million gallons of crude oil appears to have leaked from an off-shore oil pipeline roughly 25 miles off the Louisiana coast before operators shut down the pipe last Friday. So far the cause of the leak, and the exact amount spilled, is unknown, but at least the oil slick is not moving towards shore at this point. The pipeline in question moves roughly 80mb/day of crude oil, and given the variety of options in the region, this shutdown should not cause major supply disruptions for refiners nearby.

Meanwhile, a cargo ship was hijacked in the Red Sea, by Yemen’s Houthi rebel group, who said they took the ship due to connections to Israel, and would continue targeting ships in international waters until the war in Gaza ends. Despite the links between Iran, Hamas and the Houthi’s, and previous attacks on oil tankers by Iranian forces, so far there have been no apparent concerns that oil supplies may be impacted by these events. The US already has several naval ships in the area to protect the shipping routes and has downed several Houthi missiles since the war broke out, so it seems like the market is satisfied they can keep things from getting too out of hand.

That route plays a key role in European fuel supplies from the Middle East, which have seen a sharp increase since the Ukrainian war, and the startup of Kuwait’s new Al Zour refinery last year. That refinery has run into trouble in the past month however, headlines regarding its progress seem to be having some influence on the daily moves in ULSD futures. While the status of the refinery’s current operations are unclear, a weekend note from an analyst urging that the state oil firm take over control of the facility suggests a lack of confidence in its current ability to remain a stable supplier.

Chinese exports to Europe have dropped this year after setting records last winter, so it seems as though there’s some flex capacity available on the global markets, IF the government quotas allow for it to be sent overseas.

Opposite day:  After a weekend fire at the Martinez Renewable Diesel refinery, diesel basis values in the San Francisco market plunged more than 20 cents/gallon Monday, far outpacing a recent slump in the neighboring LA spot market. 

That’s not the only RD producer facing challenges these days.  A month after a judge halted construction on the P66 Rodeo refinery conversion project (which may ironically force traditional refining operations to continue for longer than planned) a Southern California facility looks like it may be running into a legal wall that could halt its expansion plans.  Add these legal challenges to the big drop in credit values and Panama Canal issues and the outlook for rapid growth in the renewables arena is looking pretty rough near term.

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