Prices Have Gone Nowhere In Spite Of Attacks
Bearish fundamental data from the API, OPEC and the IEA, and perhaps another soft start for US equity markets, are outweighing the threat of a supply disruption in the Middle East this week, as prices have essentially gone nowhere in spite of attacks on the world’s most important shipping bottleneck for crude and one of its largest pipelines.
The US state department ordered non-emergency personnel to leave Iraq, as the tensions in the region have escalated dramatically over the past few days and due to an “…increased threat stream.” So far the oil markets are not acting as though this is the next step on the path to a confrontation with Iran, as oil and product prices did not make much of a reaction to the news overnight and are holding modestly in the red this morning.
The API was said to show across-the-board builds in energy inventories, most notably an 8.6 million barrel build in US Crude oil stocks, while diesel increased by 2.2 million barrels, and gasoline stocks ticked up by 567,000 barrels. The DOE’s weekly report is due out at its normal time of 9:30 central today.
The fears of Iranian oil export declines due to sanctions were tempered by OPEC’s monthly oil market report that showed gains from Iraq, Libya and Nigeria were more than enough to offset Iran’s decrease, with the Saudi’s still taking the role of the flywheel to balance the cartel’s production. OPEC held its global oil supply & demand estimates steady from last month
The IEA’s monthly oil market report noted a sharp slowdown in oil consumption in Q1 2019, and revised its global demand estimate lower for the rest of the year, citing weaker economic data from Brazil, China, Japan and Korea among others for the weaker outlook. The counter-OPEC agency also noted the relative calm in oil markets given the rising tensions in the Middle East, declining OPEC production and quality issues with Russian oil as new supply sources manage act to insulate the market from more volatility.
Most of the time, the OPEC monthly report gets cited only for its oil production figures, but the report had several other noteworthy items as well.
OPEC on Global Refining
“In April, refining margins globally saw a counter-seasonal positive performance, as the tightness in the gasoline market witnessed in the previous month prevailed, providing stimulus for trade flows amid limited product output. Meanwhile, the peak spring refinery maintenance season is slowly approaching its end. In all main trading hubs, markets of all other key products, with the exception of gasoline, witnessed losses, in line with seasonal trends and given the recently increasing supply-side pressure.”
OPEC on Non-OPEC oil production
“In 2018, non-OPEC oil supply experienced a robust growth of 2.91 mb/d, amounting to more than three times the increase seen in the previous year, and was led by the y-o-y gains of 2.26 mb/d in the US. In addition to the US, other non-OPEC countries, such as Canada, Russia and UK contributed to the gains. Indeed, the recovery in oil supply in 2017 and 2018, following the contraction in 2016, was driven by improving oil market conditions and rising oil prices, with NYMEX WTI increasing by around $14/b, or 27.5%, y-o-y, to average $64.90/b in 2018. Free cash flow (FCF) in non-OPEC reached to a record high of $310 bn in 2018, a jump by almost 100% y-o-y. There are several reasons to why free cash flows have improved from the low of $35 bn seen following the oil price collapse in 2015. Key among these reasons are the higher oil prices, lower cost levels and reduced investments. The non-OPEC’s FCF in 2019 is expected to decline 15%, before rising again by 23% to reach $324 bn in 2020.
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The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.
Week 15 - US DOE Inventory Recap
Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
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