Shift In Storm’s Path Reduces Threat Of Widespread Supply Disruption
RBOB gasoline futures rallied almost 30 cents in 3 days to start the week, first finding a bid when chart support at the $2 mark held, building momentum as equities rallied, then taking flight Wednesday as the potential for a major hurricane to strike the heart of refining country became a reality. We’re seeing a modest pullback this morning as a shift east in the Storm’s path reduces the threat of widespread supply disruption, but the market will no doubt stay on edge for the rest of the week given the severe nature of this threat.
The national hurricane center is giving 90% odds that the storm in the Caribbean (likely to be named Ida) will form in the next 2 days. Conditions are ripe for rapid development over the warm waters of the Caribbean and then the Gulf of Mexico, with some models suggesting this will become a category 3 hurricane as it heads towards the US Gulf Coast early next week.
The latest models have shifted the projected path east to Louisiana, but the error cone is still high with the entire Texas coast still possibly in range depending on how steering currents shape up this weekend. To try and put it another way, it looks like the US refining zone is about to take a big punch, the only question is if it will be to the head, the midsection, or will it deflect harmlessly off a shoulder?
Worst case scenario is a strike in the Houston area that can disrupt not only numerous refineries, but also multiple pipeline origin points, the country’s busiest shipping lanes, not to mention corporate headquarters. The 2nd worst spot is a strike on the Beaumont/Pt Arthur area due to its concentration of large refineries and pipeline origins, and then the potential impact to supplies in the rest of the country diminish as the forecast moves east. This morning’s pullback in futures seems to be reflective of the storm’s projected shift east, although the overall supply/demand balance is tighter than it’s been in years, so we won’t have a buffer to offset lost production like we did during last year’s hurricane parade, so don’t be surprised to see prices move with each new data release from the NHC this week.
One other potential fallout from the storm: RIN Prices saw a big jump Wednesday, and so far there’s not a story out of Washington DC to blame it on. Since Gulf Coast refiners export roughly 20% of their production, and those export flows are likely to be disrupted from this storm, it’s possible those refiners were forced to cover RINs for product that would otherwise go overseas and not incur an RFS obligation. There’s also the potential that the East Coast will need more gasoline imports if Gulf Coast production is curtailed, another bullish factor for RINs, and then again it’s just as likely someone is betting last week’s rumors on lower RFS targets that sent prices tumbling may not pan out.
WTI and ULSD futures lagged the spike in RBOB, which is common any time there’s a disruption since the lines of cars around the street are filling up gasoline, not diesel or crude oil. ULSD did manage to erase the full amount of its 7 day selloff, which leaves the door open for a push towards the year’s highs around $2.20. One other factor spurring extra volatility in the RBOB contracts is that the prompt September contract (which expires Tuesday) is the last summer-grade spec of the year. Most Gulf Coast, West Coast and Chicago-area physical trades are already transitioned to the October futures reference, so a lack of liquidity in September could make that U/V spread even more dangerous than normal.
Charts from the DOE weekly report are included in the link below. Note how much lower inventory levels are compared to this time last year, and you’ll better understand why this storm has the market on edge whereas we largely shrugged off 6 landfalls in 2020.
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The Recovery Rally In Energy Markets Continues For A 3rd Day
The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.
Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.
Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.
Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.
The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.
So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.
The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.
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Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday
Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.
RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.
The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.
PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.
Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.
Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.
Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.
California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.