Refined Products Trying to Pull Crude Oil Prices Up from 9 Month Lows

Refined products are trying to pull crude oil prices up from 9 month lows this morning as Tropical Storm Cindy is bearing down on 6 refineries that make up 15% of the country’s total production.

Perhaps most notable is that despite the path of this storm, products are up less than a penny, whereas in year’s past we may very well have seen 5-10 cent increases in prices from a system heading right for the heart of the gulf coast refining hub, further proof of the dampening effects of the country’s excess supply.  Even gulf coast basis values have barely flinched as the forecasts for this storm have unfolded, whereas the storms of years past often were accompanied by spikes of 10-20 cents or more, with $1/gallon increases not unheard of.

Notable refineries within the forecast cone for TS Cindy’s path.

Refinery Location Capacity (MB/Day)

Motiva Pt Arthur             635

Valero   Pt Arthur             415

Total      Pt Arthur             245

Exxon    Beaumont           359

P66         Westlake LA       273

Citgo      Lake Charles LA   440

Fortunately the refineries in the Houston/Pasadena hub are on the less-dangerous western side of the storm’s path currently, but flooding and power outages will remain a concern for the next couple of days.  Once the storm passes however, assuming no long term damage to refineries or other infrastructure, it will be put up or shut up time for energy bulls as prices remain teetering on the edge of another big move lower as solutions to the global supply glut seem few and far between.

Yesterday the API was said to show a crude oil draw of 2.7 million barrels, while diesel built 1.8 million and gasoline built 346 thousand barrel.  Those product builds, particularly gasoline which is in its peak demand season is the latest in a long string of reminders that the US can now produce much more refined products than its able to consume.  The EIA will release its weekly inventory report at 9:30 central today, and earlier this morning they released this study on the growing demand for premium gasoline, and its effect on price.

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A look at the refineries in the path of TS Cindy.

Oil Prices Drop Below $43 for the First Time Since November

Oil prices dropped below $43 for the first time since November this morning as the “calling OPEC’s bluff” sell-off stretches into its 5th week.  The selling accelerated as soon as WTI broke through the May low of $43.75 overnight in the latest of what’s been a series of technical trap doors.

Although the July WTI contract expires today, the August contract is already trading below the May lows, which suggests this technical breakdown is not just an expiration day anomaly.  If prices hold at current levels, the next downside target looks to be the November low print at $42.20, followed by the low set last August at $39.19.

Much of the US Gulf Coast is now under a tropical storm warning, as yet-unnamed system intensifies as it moves north.  Forecasts call for Tropical Storm Cindy to be named tonight, before making landfall tomorrow.  So far energy prices are shrugging off the threat, but the system is headed for the heart of off-shore production and could cause flooding near several of the country’s largest refineries, so it’s possible we could still see prices move higher today if that threat materializes.

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Energy Futures Struggling After Overnight Bounce

After 4 straight weeks of selling, energy futures are struggling to pick themselves up this morning as an overnight bounce has reversed course and turned into small losses.

Here’s the latest indicator of how much the oil market has changed now that it has the excess-supply buffer:  6 years ago when the Syrian civil war star was starting, concerns over the conflict helped push oil from $85 to $114/barrel.  Yesterday, the pentagon said that the US actually shot down a Syrian government jet for the first time, and prices didn’t flinch.

6 more oil rigs were put to work last week according to Baker Hughes.  While that slow and steady growth is what we’ve come to expect in 2017, what’s unusual is that for a 2nd week it wasn’t Texas that accounted for most of the move.  This past week it was Colorado and North Dakota that had increased counts, while the Texas tally was unchanged.

Speculators were decidedly bearish last week, adding new shorts that cut the net long position in Brent and WTI, while pushing RBOB into a net-short position and ULSD to its largest net-short position in the past 18 months.  While that type of reaction isn’t surprising following 4 consecutive weekly price decreases, extremes in either direction for speculative holdings can be contrary indicators, so watch that net short in diesel to see if it sparks a short-covering rally should prices find a floor.

There are two storm systems being watched in the Atlantic this week.  While one of them is predicted to be broken apart in the Caribbean, the national hurricane center is giving a 2nd system known for now as 93L an 80% chance of developing in the next 2 days, and a 90% chance in the next 5 days.  This storm appears to be heading into the Gulf of Mexico, but it is given a very low chance of becoming a hurricane due to colder than average water temps, and high wind shear.  There could be some evacuations of oil rig workers depending on the path of this system, but should not do any long term damage to energy infrastructure, and at this point the biggest threat looks to be from potentially heavy rainfall wherever it comes ashore.

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Energy Complex Trying to Carve Out a Bottom

The energy complex is trying to carve out a bottom, with RBOB gasoline prices leading the move higher this morning, just as they’ve led the moves lower most of the week.  Despite the recovery bounce Thursday and 2 cent increases in refined products this morning however, we’re still on pace to have a 4th consecutive weekly decline and remain near the bottom end of the price range for the past 9 months.

RBOB gasoline futures hit their lowest levels of the year Thursday, with the July contract bottoming out at $1.4101 before bouncing 4 cents.  That low marks a 26 cent drop from the highs set back in May, and while short term indicators are in oversold territory and begging for a bounce like we’re seeing today, the charts still show more downside potential longer term and fundamentals are doing little to contradict that theory.

There is not much in the way of news this morning to support this bounce, so it appears to be more short covering and/or bottom fishing than a reversal of the downward trend.  Crack spreads have taken a beating this week, so the relative strength in products today could be a reaction to those changes.  In addition, ethanol RINs have climbed back north of 77 cents for the first time since early January, which is likely helping push gasoline prices higher.  There was talk that the EPA may provide guidance on the 2018 renewable obligation levels this week, but so far nothing official has been released.

There is a rough patch of weather that the national hurricane center is giving a 60% chance of developing into some sort of storm over the next week, which is heading towards the gulf of Mexico.  It’s still too soon to say if this could be a threat to oil production off-shore, or refineries on shore, but it’s the first of what’s predicted to be many threats this season.

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Gasoline Prices Leading the Energy Complex Lower Again this Morning

Gasoline prices are leading the energy complex lower again this morning, after the DOE report tripped the technical trap door Wednesday and unleashed a tidal wave of selling.

The heavy selling seems a bit extreme when you look at just the inventory levels from last week.  Sure gasoline inventories rose, but the total rise was driven by an increase on the West Coast, while PADD 1 which is home to the NYMEX delivery point declined.  Crude stocks ticked lower, and the Cushing OK hub saw inventories draw by more than 1%.  So what’s the deal with the meltdown?  It seems like there must have been hope for a demand recovery after a large decline last week, and when yesterday’s report showed further declines, that hope was lost and the liquidation began.  Now the only question is will Crude and diesel prices join gasoline in breaking through the May 5th lows and potentially slide another 5%, or will they hold on and pull gasoline back from the brink?

As expected, the FED raised its target interest rate by 25 points, and laid out plans to gradually lower the assets held on its balance sheet over the next several years.  From 2002-2008, the FED’s assets grew from $700 Billion to $900 Billion.  Since 2008, the assets held have ballooned to nearly $4.5 trillion, so to say it will be reduced by around $10 billion per month seems like a drop in the bucket.  Stock markets seemed to like this relatively dovish stance, and the DJIA finished at a new record high as a result.  Energy markets didn’t even flinch on the news, in the latest sign that the two asset classes are comfortable going their own way, or perhaps the speculative funds that had been content to stay passively long in commodities in the search for an inflation hedge over the past several years are flooding the bitcoin market instead.

A few other notable items from the DOE report:

Note the surge in PADD 3 distillates over the past 2 weeks, in spite of strong export activity.  If that trend continues, refiners may struggle to find a home for the diesel production.

Midwestern (PADD 2) refinery output reached an all-time high, even though there are reports of a couple smaller plants having unplanned maintenance last week. While PADD 3 runs justifiably garner the most attention since the gulf coast is home to half of the country’s refinery capacity, PADD 2 is quietly producing more than both the East and West coasts (PADDs 1 & 5) combined.

Exports remain above year-ago levels, but are well below the highs we saw earlier in the year, and may be further cause for concern if they don’t pick back up soon as domestic consumption is clearly not up to the challenge of balancing the supply/demand equation.

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