The Relentless Recovery Rally For Energy Contracts Is Continuing For A 5th Straight Session

The relentless recovery rally for energy contracts is continuing for a 5th straight session as traders around the world nervously await the anticipated escalation of violence in the Middle East and as a major hurricane is now churning through the Gulf of Mexico, just 3 days after the NHC gave it 40% odds of even getting a name and less than 2 weeks from Helene’s devastating landfall. It’s worth noting that despite the big rally over the past week, RBOB and ULSD futures have not yet broken out of their bearish weekly chart patterns, so there could be more downside ahead if the “Buy the rumor, Sell the News” trading pattern happens once Israel’s attack does occur.

Today marks 1 year since the invasion of Israel sparked the latest war in the region. As the world nervously awaits Israel’s retaliation to last week’s missile barrage, Iran’s Quds force commander has gone missing following attacks on Beirut. If in fact those strikes killed the leader (who replaced Qassem Soleimani who was killed in a US drone attack 4 years ago) it’s theoretically possible that will temper the direct attack on Iran itself as at least part of the promised retaliation has already occurred.

While Milton could end up being a storm that is remembered for decades to come, it should be a relative non-issue for oil production and refining as it’s staying well to the South and East of the Gulf of Mexico wells and refining hubs. The current path could deal a devastating blow to the Tampa bay area as the bay will act as a funnel for the wall of water being pushed onshore, and could do severe damage to the port and terminals along the waters edge, not to mention all of the other buildings in the area. If Tampa’s terminals are damaged, expect Orlando to run out of bulk fuel supplies quickly as the only terminal in the city is fed via pipeline from Tampa. At this point, the best hope is a further shift to the south in the storm’s path that would keep Tampa on the clean side of the storm, while a shift north that puts the bay on the incoming side of the water flow could lead to devastation on a scale not seen in a century. See maps below.

And just like that…the big arbitrage window to move diesel north from LA towards San Francisco-fed markets has slammed shut as SF spot basis values have collapsed from a 45 cent premium a couple weeks ago to just a 3 cent premium today.

The CFTC’s latest COT report showed modes short covering in energy contracts as of last Tuesday when the weekly data was compiled, but based on the price action in the back half of the week, and this Bloomberg note on the skew towards call options, it’s clear that money managers were reversing course and getting back on the bullish bandwagon after seeing record amounts of speculative money bet on lower prices in the past few weeks.

Baker Hughes reported a decline of 5 oil rigs active in the US last week, while natural gas rigs increased by 3.

Alon’s (Delek) Big Spring refinery reported an upset in a distillate hydrotreating unit over the weekend that resulted in 6 hours of flaring. Valero reported an upset in an FCC unit at its McKee TX refinery that’s known as one of the TCEQ’s frequent fliers, and was just returning to normal rates after fall maintenance. Both of those facilities help supply the Permian basin region amongst other neighboring markets, and given the new pipeline supply options and shrinking demand in the region, upsets today are much less notable than they were a few years ago.

The warning flag is up: Shell reported that it expects sharply lower earnings in Q3, which is going to be a theme across the industry as reports start tricking in later this month. The big question at this point is which facilities will be forced to curb refinery run rates to avoid a major cash burn in Q4.