TAC Market Talk

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Markets Try to Digest Latest Info From the FED, EIA and NOAA

Crude oil and Diesel prices had a strong day Wednesday, with WTI settling above $50 for the first time since July 31st, and ULSD settling above $1.80 for the first time since July of 2015.  We’re seeing some of those gains given back this morning however as markets try to digest the latest info from the FED, the EIA and NOAA.

Similar to what we saw Tuesday, we got good news and bad news on the refinery recovery front during Wednesday’s session that kept prices from finding clear direction.  Exxon reported that it had restarted units at its Beaumont refinery, which is near the Pt. Arthur refining cluster hardest hit by Harvey.  Then, just as that good news was leading to some product selling, we got news of another refinery fire, this time at the Shell Deer Park plant, that kept the sellers from getting too bold.  Although both of the fires we’ve seen the past 2 days do not appear to be affecting production long term, they are a reminder of how perilous the process of restarting a refinery can be.

Forecast models are showing a better chance that Maria will stay out to sea and not make a landfall on the US East Coast, but uncertainty in those models since they don’t generally have to deal with 2 storms interacting means that we’ll have to keep watching this storm at least through the weekend.

The FOMC yesterday announced the first step in reducing the size of its asset holdings, and held its plans for another rate hike by year end.  The FOMC statement also included this statement about the hurricanes:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

Notable Items from the DOE Report:  The recovery is in full swing.  Refinery runs increased by more than 1 million barrels/day, and while diesel demand is very strong, it’s already once again being outpaced by diesel production, despite close to 10% of refining capacity still offline.   Crude oil output is already back above 9.5 million barrels/day, and could create an interesting race towards 10 million barrels/day by year end if declining rig counts don’t derail the progress.  While gasoline stocks did decline again, they’re still above the 5 year average, an impressive feat considering we just went through the worst spat of hurricane activity in a decade.

The US exported more crude oil and diesel last week than it did in the weeks before Harvey, the latest piece of evidence of the Gulf Coast’s prominence as a global hub for petroleum supply.

CLICK HERE for a PDF of today’s charts

Oil Prices Pushing Modestly Higher

Oil prices are pushing modestly higher this morning and WTI is making another attempt to push north of $50 as the Harvey healing continues, and more rumblings about another OPEC Cut make their way through the headlines.  The moves remain cautious however as it seems that traders are weary of making any big moves until the storms pass.

Hurricane Maria became a category 5 storm last night and is currently wreaking havoc on many of the islands hit hard by Irma just over a week ago.  While Hurricane Jose is still moving along off the US East Coast, bringing rain to the New England coast this morning, it appears like the largest impact that storm may have will be how it impacts the path of Maria.  Some models show Jose’s 2nd loop helping to keep Maria out to sea and avoiding a landfall in the US.  If that doesn’t happen Maria could end up in the Carolinas.

While neither Jose or Maria appear to be a major threat to US energy infrastructure, it looks like the former Hovensa terminals (now Limetree bay) on the Island of St. Croix may take a direct hit from Maria early Wednesday, which could disrupt some of the import/export activity in the Atlantic basin.

This is a busy week for refinery restarts in the Houston and Pt. Arthur hubs with 4 of the larger plants shuttered by Harvey all in some phase of the process.  As Bloomberg noted yesterday, the huge undertaking of fixing and restarting these plants means that typical fall maintenance across the US will be delayed, which could lead to a glut of products later in the year, and perhaps a tighter than normal spring.

CLICK HERE for a PDF of today’s charts

Mixed Start for Energy Prices

It’s a mixed start for energy prices as we wait to see what two Hurricanes & the FOMC will do to roil the markets this week.

The parade of hurricanes continues to keep markets on edge as Jose looks to pass uncomfortably close to the US coastline this week and is forecasted to bring heavy rains to parts of New York and New England.  This storm already made one loop in the Atlantic last week, and now some models suggest it will make another before heading back towards New Jersey as a sub-tropical system later this week.  If that proves true it could be a demand killer as the heavy rains keep drivers off the roads.

Hurricane Maria is now taking the temporary title of the scariest storm to watch as it ramps up to a major hurricane and heads towards several of the islands still reeling from Irma.  We may not have a definite answer on whether this storm will hit the US for another week, but the long range models suggest the South Eastern coast faces the greatest threat of another hurricane landfall.

The FED is expected to announce how it will start reducing its $4 Trillion in asset holdings this week, a move long telegraphed as part of the FOMC’s multi-year plan to return to a more traditional monetary policy nearly a decade after the financial crisis began.

The moves by money managers were fairly muted according to last week’s CFTC report with WTI showing a slight decline in the net long holdings of speculators, while Brent, RBOB and ULSD all gained.  The net long position in ULSD reached its highest level in more than 4 years – just as ULSD futures reached a 2 year high.  That should be a cautionary note for any diesel bulls that the money managers have already made their bets on higher prices, so someone else have to step in to bid the market up from here.

Baker Hughes reported a decline of 7 oil rigs last week bringing the total to its lowest level since June.  Texas, Colorado and North Dakota all contributed to the decline, suggesting that the cool down in the pace of drilling activity is not confined to a single shale play.

CLICK HERE for a PDF of today’s charts

The latest on Hurricane Maria from Weather Underground.

Markets on Edge this Morning

3 things we didn’t any need more of:  Missile launches, Terrorist Attacks and Hurricanes.  Unfortunately all 3 happened this week and have the markets on edge this morning, right after the DJIA ended at a new record high Thursday.

Energy markets are acting tentatively so far, likely waiting for the other financial markets to wake up before making a move.  WTI is hovering around the $50 mark, and beginning to show signs of bottoming on the spread vs Brent.  Refined products are holding slight gains as some storm interference with the NYH from Jose, however unlikely, still can’t be completely ruled out.  ULSD and WTI futures are both looking strong technically, with a break above $1.80 and $50 potentially triggering another wave of buying.  RBOB gasoline meanwhile looks very bearish, setting up an interesting tug of war for price control in the back half of the month.

Jose is completing its Atlantic loop and is expected to begin heading north this weekend and could brush the East Coast next week.  While the majority of models keep the storm off-shore, the forecasts have been steadily shifting to the West the past two days, and for the millions that watched Irma go from a forecast on the east coast of Florida to the west, it’s easy to see why this system will still need to be watched closely.  The National Hurricane Center is still monitoring 2 other systems that may develop over weekend.

Gasoline prices continued their return to earth Thursday as both futures and cash markets across the country fell again.  It will still be at least 2 weeks before Gulf Coast refinery and pipeline operations are back to full strength, but there are daily signs of progress and allocation restrictions across the south east continue to ease.  Florida ports are also seeing increased levels of activity, and there is no shortage of vessels with fuel available to deliver to the state, it will just take several days to push it through the logistical bottlenecks on land.

CLICK HERE for a PDF of today’s charts

Oil Prices Moving Higher for a Fourth Straight Day

Oil prices are moving higher for a 4th straight day, and WTI is testing the $50 mark for the first time in more than a month as the market seems ready to look forward to optimistic economic reports, and put the hurricanes of 2017 in the rearview mirror.

No major updates today on the recovery efforts in Texas or Florida this morning, both states seeming to make steady progress in their march towards normalcy.  The Department of Homeland Security expanded its temporary Jones Act waiver in time and location yesterday when it became known that many ports along the East Coast weren’t covered in the first version.  Oddly enough the new order includes New Mexico, which is not exactly a hot spot for waterborne fuel shipments.

Notes from the DOE report:  The snapback in crude oil output and exports prove how quickly the Gulf Coast is healing after Harvey.  While refinery runs still dipped on the week, the drop was not nearly as severe as the previous week, suggesting plants returning to service and offsetting those in the Pt Arthur area that had to shut several days after Harvey’s first landfall.  If this week’s report marks the bottom for refinery runs, it’s worth noting that despite almost every Gulf Coast plant being effected in some way by the storm, total throughput rates held 2 million barrels/day above the levels they dropped to during the hurricanes of 2005 and 2008, a testament to the added capacity that’s been brought online in the past decade.

Similarly, although gasoline inventories had their largest weekly drop on record, they’re still above the 5 year average for this time of year, proving how the supply glut the industry has been struggling through buffered the effects of Harvey.

Hurricane Jose continues its loop in the Atlantic, and is still projected to stay off shore of the US East Coast next week.   2 more potential systems are forming off the West Coast of Africa, with one given coin-flip odds of developing into a storm that will head for the US in just under 2 weeks.  With Katia already having been named and making landfall in Mexico last week, this storm will be named Lee if it develops.

CLICK HERE for a PDF of today’s charts

Oil Prices Moving Higher for a 3rd Straight Day

Oil prices are moving higher for a 3rd straight day, encouraged by a pair of bullish monthly reports from OPEC and the IEA and the ongoing recovery efforts from the pair of hurricanes to hit the US in the past month.  What different today is that refined products are moving in tandem with oil prices so far, something that we often take for granted, but that was scarce in the weeks following Harvey’s attack on US refineries.

Gulf coast cash markets for both gasoline and diesel price tumbled sharply Tuesday – even though futures were moving higher most of the day – in the surest sign yet that the post Harvey recovery efforts are progressing.  Terminals in Tampa and Pt. Everglades Florida seemed to be operating near full strength Tuesday, although long lines at terminals, treacherous roads and power outages are still expected to hamper the post Irma recovery.

Yesterday the API was said to report US Crude inventories increasing by 6 million barrels while gasoline stocks were down almost 8 million barrels, and diesel stocks were down 1.8 million.  Those figures are right in line with what you might expect with around 2 million barrels/day of refining capacity still offline following Harvey, although some are predicting even more dramatic figures in today’s EIA report.

Similar to OPEC’s report yesterday, the IEA this morning is projecting an uptick in global demand for oil products this year, even though Harvey & Irma will weigh on US consumption in the third quarter.

A note on how critical the US Gulf Coast has become to global markets from the  IEA’s Oil Market Report:

While the industry responded much better than a decade ago when severe storms hit the Gulf Coast, the region nowadays is more important to the global oil market.  For a long time it has been a production and refining hub; today it is an important global trading centre with more than 4 mb/d of products and 0.8 mb/d of crude oil being exported… The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail.

Hurricane Jose continues on its Atlantic loop and should begin heading north again over the weekend.  The likelihood of an east coast landfall has declined over the past 2 days, but it still can’t be completely ruled out as some models still show the storm making a run at Cape Cod next week.

CLICK HERE for a PDF of today’s charts

Gasoline Futures Trading Higher this Morning

Gasoline futures are trading higher by around 1.5 cents this morning, which would mark their first gain in 7 sessions if they can hold, as news that Hurricane Jose could make a loop in the Atlantic and head towards the East Coast of the US or Canada keeps traders on their toes.  Even though this system is not predicted to re-gain Major Hurricane status like Harvey or Irma, it’s a little exhausting to think we are now just ½ way through the 2017 hurricane season, and have another potential threat slowly churning not far off shore.

While damage assessments are still underway at several ports effected by Hurricane Irma, activity has resumed at fuel terminals in Tampa and Pt. Everglades, 2 of the largest fuel hubs in Florida.  With those two ports avoiding major damage, it seems like the bigger hurdles in returning the state to a state of normalcy will be road conditions and power restoration.  While the focus all weekend was on the potential damage of the category 4 winds on the West Coast of the state, it looks like the storm surge near East Coast ports like Jacksonville, Savannah and Charleston may have a larger influence on regional fuel supplies this week.

RBOB futures are trading more than 50 cents below their hurricane & expiration day induced spike on August 31, but could possibly find chart support between the 50 & 200 day moving averages which are straddling the $1.60 mark.  On the other hand, those support levels were built during summer gasoline season, and there’s a strong argument that the EPA-allowed early transition to winter grade gasoline could inspire another 20-30 cents of downside as more US refiners delay maintenance in an effort to quickly resupply storm-ravaged markets, and take advantage of the best margins they’ve seen in years.

ULSD futures are also looking weak after failing to break $1.80 last week, and then breaking below the Pre-Harvey bullish trend line yesterday.  The $1.70 range looks to be a key pivot point this week that may determine if the next stop is $1.60, or another try at $1.80.   With funds already holding their largest net long positions in both refined products of the year, and with the worst of the Harvey supply scare behind us, it seems like the bulls will need some other event to keep prices from seeing another heavy wave of selling.

OPEC’s monthly oil market report is forecasting an increase in global economic activity and oil demand for the year, revising previous estimates higher, and predicting that Hurricane Harvey will have a negligible impact on long term US crude balances and economic activity.  The cartel also reported that total OPEC oil output dipped during the month, although without a 112mb/day decline in Libya it would have been an increase, and compliance with the output cut targets continues to decline.

CLICK HERE for a PDF of today’s charts

Major Ports Weather the Storm in the South East

September 11th is a somber day for the US, and today perhaps more than in years past as we remember the terrorist attacks 16 years ago, while assessing the damage done by another major hurricane still making its way across the South East.

Early reports suggest that while damage is widespread across the state of Florida, the major ports seem to have weathered the storm fairly well, and could begin to resume operations in the next couple of days.   If that proves to be true, we should see the fuel situation heal up in a matter of days instead of weeks.

RBOB gasoline futures are trading lower for a 6th straight days as it appears that supplies are healing, while demand may suffer from this latest storm.  WTI is holding onto small gains as gulf coast refineries continue to make slow but steady progress towards business as usual.

On Friday the Department of Homeland Security temporarily waived Jones Act restrictions on vessel movements between US ports, partially to ensure that as much fuel as possible could get to market in the aftermath of Harvey and Irma. It’s difficult to say whether this will have a material impact on product flows given the short time frame, and logistical constraints, but it’s definitely a sign – along with the widespread product grade waivers issues by the EPA – that the feds are serious about getting energy markets back on their feet as quickly as possible.

While Irma moves out of Florida, hurricane Jose continues to spin relatively harmlessly out in the Atlantic and away from land.  New forecasts suggest that storm could be pushed back towards the East Coast next week however, so we’ll be stuck watching another system for at least the next 7-10 days.

The net long positions for WTI and Brent held by money managers were little-changed last week, but refined products both saw their net long positions reach their highest levels of the year as funds placed bets on higher prices in the aftermath of Hurricane Harvey.

The number of active oil rigs dropped by 3 last week according to Baker Hughes, the 3rd time in 4 weeks the count has declined after reaching a 2 year high.   The slow but consistent plateau effect suggests that current prices are hovering around the break-even level for US shale plays.  Something to watch for the rest of 2017 is whether or not the re-opening of the Brent/WTI spread beyond $5/barrel will drive enough demand for exported crude to influence the behavior of the drillers.

CLICK HERE for a PDF of today’s charts

Energy Markets in Wait and See Mode this Morning

Many eyes remain glued to the weather channel as Hurricane Irma makes its way closer to the US.  The hits just keep on coming as an major earthquake struck Mexico overnight triggering Tsunami warnings and another potential storm system is developing off the coast of Africa in addition to the “other” 2 hurricanes we have today.  To put in perspective how chaotic the weather scene is right now, one of the challenges cited yesterday in predicting Irma’s exact path is that the outflow from Katia is interfering with wind currents and confounding computer models.

Energy markets seem to be in wait and see mode this morning as traders catch their breaths after an extremely volatile couple of weeks.  While diesel prices have been something of an afterthought during the gasoline rollercoaster of the past two weeks, ULSD futures have quietly climbed to their highest level in more than 2 years as global demand remains strong and several of the largest US producers remain offline.

More good news on the Harvey recovery front as both Explorer and Colonial pipelines restarted origin points that had been shuttered due to the storm.  It will still be weeks until we get a full recovery, and the demand spike ahead of Irma certainly won’t help most of the South East, but these are major steps in the right direction.

CLICK HERE for a PDF of today’s charts

The one chart that really matters from yesterday’s DOE report is the refinery throughput.  Considering that many plants were operational through last Tuesday/Wednesday, we should see another large drop in next week’s report before the refinery recovery begins to show up in the data.

The “other” charts from the DOE weekly status report that show the dramatic effects of the refinery and port closures had.

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