Energy Markets Moving Higher For Second Day

Energy markets are moving higher for a 2nd day, adding modest gains in the early going after Wednesday’s big rally sparked by a variety of supply concerns, both real and imagined. 

Protests in Libya shut that country’s largest oil field, while separate attacks in Iran and Lebanon, combined with the ongoing drama in the Red Sea suggest the violence is most certainly not contained near the world’s key oil producing countries.   

So far, futures markets are shrugging off the API’s report of huge after-Christmas inventory builds for both gasoline and diesel that approached 7 million barrels each last week, although cash markets can’t seem to look the other way.  

Not buying it: Softer basis values in cash markets around the country suggest the big physical players aren’t seeing much product tightness to drive the run up in futures. San Francisco gasoline diffs are leading the move lower, down some 25 cents so far this week, as traders shrug off multiple refinery hiccups in the Bay Area over the past two weeks. LA diesel basis dropped by nearly a dime Wednesday as the annual diesel demand doldrums cause inventories in the region to swell, and the lack of clarity on Renewable Diesel supply keeps traders guessing. A parade of winter storms is forecast for the West Coast over the next couple of weeks which will not help demand, even though the forecasts suggest it won’t be as impactful as last year’s record setting rain and snow.

Speaking of storms, the North East is bracing for its first major winter storm in almost 2-years this weekend, but temperatures are not expected to drop substantially below average levels suggesting here too the weather might have more impact on dampening driving demand without upsetting supply or driving a sharp spike in heating oil usage. A 2nd winter storm is expected to sweep large parts of the country next week as well, with ice and snow possible as far south as North Texas, although here too the forecasts do not suggest abnormally cold weather will be at play.

The lack of cold air should keep the heating oil curve in check, but any time we see stronger time spreads this time of year due to expected heating demand surges, it’s likely we’ll also see offsetting negative moves in diesel basis values in other spot markets since physical supplies outside the North East generally aren’t impacted, and are often at their most ample this time of year.

The DOE’s weekly report is due out at 11am Eastern. We often see large draw downs in oil supplies in the last weeks of the year as shippers around Texas hold barrels off-shore to limit year-end property taxes, so don’t be surprised to see the EIA’s data match or exceed the large draw reported by the API.

Valero’s refinery in Port Arthur, TX reported an upset in a hydrocracking unit Wednesday that lasted nearly 5 hours. No word if other units were forced to curb runs from this event, and USGC cash markets didn’t seem to react to the news.

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