TAC Market Talk
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Here we go again. Gasoline prices are up more than 3 cents this morning on news that Tropical Storm Nate is likely to make landfall in the US as a hurricane Sunday, and the New Orleans area – home to the largest refining hub outside of Texas – is now in the forecast cone.
At this point, the storm seems to be steering east of the 1.6 million barrels/day of refining capacity around New Orleans, but the Chevron Pascagoula (370mb/day) and Shell Saraland (95mb/day) plants look to be in the current path. There was a notable shift west in the forecast overnight however, and if that happens again, it will put more refineries and off-shore production at risk.
While uncertainty in these forecasts is to be expected, one thing the models are agreeing on is that this storm should not get close to the strength of Harvy, Irma, Jose or Maria, so unless it makes a direct hit on a coastal refinery, the impacts on prices “should” be short-lived.
Notable Items from the DOE report:
PADD 1 refinery runs dropped sharply on the week, proving the stories that rough seas caused by Hurricanes Jose and Maria interfered with crude oil deliveries in the past couple of weeks. With conditions along the East Coast back to normal, we should see those run rates bounce back next week.
The recovery in PADD 3 refinery runs seemed to have stalled out last week, with only a small increase, suggesting that the Pt. Arthur-area facilities may be taking longer than expected to get back up to speed. There were also multiple fires reported at plants initiating restart that likely contributed to the small increase.
Crude oil inventories dropped sharply as US exports of crude reached a record high just under 2 million barrels/day.
The latest on TS Nate from the EIA’s energy disruption map.
Energy futures are treading water this morning, recovering from some heavy overnight selling pressure after WTI managed to survive its first trip below the $50 mark in the past 2 weeks. It’s clear that the momentum gained in September was wiped out in the past week, but now there are some critical tests near term to determine if the bears are really in control, or if the bulls were just taking a break.
The API was said to show gasoline inventories increasing by more than 4 million barrels last week, while crude oil inventories declined by 4 million barrels. Those movements seem consistent with the theme of the ongoing Post-Harvey refinery restarts, and perhaps foreign gasoline cargoes booked during the price spike that followed the storm reaching their destination. Diesel stocks were estimated to have declined by more than 500,000 barrels last week, which is helping ULSD hold onto small gains this morning while crude and gasoline contracts remain in the red.
The DOE’s weekly inventory report is due out at 9:30am. Regional markets in the southeastern US are showing signs of being long on regular unleaded, suggesting we may see a large PADD 1 gasoline build that could put RBOB under more pressure today.
The $1.54 area looks to be a pivotal point for RBOB near term, having held support in each of the 3 trading sessions this week. The $1.54 area was also where we saw RBOB make a short term bottom on July 24 before rallying 17 cents in the next 5 trading sessions, and on August 17 before the Harvey rally took hold. The major difference this time around is that we’re trading winter RVP spec gasoline which could make that support level more difficult to hold. Charts suggest we’re heading for $1.40 if it doesn’t.
The national hurricane center is giving 90% probability of a tropical storm developing in the next 48 hours, and forecasts suggest that “Nate” will be the next threat to the US Gulf Coast over the weekend. Current models suggest the storm should stay East of most oil production and refining assets, although the New Orleans area is in the cone of possibility for landfall.
It’s been a rough start to October for energy markets with heavy selling Monday followed up with more losses so far today. RBOB futures are trading lower for a 6th straight session, ULSD is down for a 4th, and WTI is now testing the $50 mark heading in the wrong direction if you’ve been betting on higher prices.
Spot gasoline prices in both the US Gulf Coast and the NY Harbor both dropped below pre-Harvey levels for the first time this week. We’ll get the best look at how the refinery recovery is coming along in the API and DOE reports due out over the next 26 hours, but at the moment, both fundamental and technical factors are suggesting there’s plenty of room for gasoline prices to continue their decline.
While gasoline prices took the lead for much of September, diesel futures are taking charge this morning as both ULSD and European Gasoil contracts drag the rest of the complex lower. This relative weakness could be driven by liquidation in the large speculative positions held in diesel contracts on both sides of the pond. Like gasoline, charts for diesel futures are looking very weak, with a critical test coming this week in the low $1.70s, which is likely to determine whether or not we see another 10 cent drop in October.
Warren Buffett is buying a 38.6 % stake in Pilot Flying J this week, with a plan for Berkshire Hathaway to become the majority owner of the company by 2023. The Haslam family will retain control of the company through that point, and the headquarters will stay in Knoxville.
There is another potential tropical threat, currently given a 30% chance of developing into a storm over the weekend in the Gulf of Mexico. Unlike the September storms that formed in the Atlantic and moved West towards the US, this system is coming north from Central America. Water temperatures in the Gulf of Mexico and Caribbean are still above average for this time of year and will still support tropical development for several more weeks.
Ethanol RINs seem to have found a temporary floor, rebounding back above the $.70 mark Monday, as doubts about the implementation of two ideas that would reduce the burden on obligated parties under the Renewable Fuel Standard set in. Similar to what we saw earlier in the year, there’s a difference between what the EPA can propose and what the courts will allow to happen unless congress changes the RFS.
As the 3rd quarter comes to a close, the September pattern of conflicting movements in petroleum prices is holding true again. It’s certainly been a September to remember, although unfortunately due to record setting storms, it’s a month that many would rather forget.
RBOB gasoline futures won the daily tug of war match with WTI and ULSD Thursday, dragging them to a lower settlement after a strong start. The reversal from a 5 month high for WTI created the outside-down daily trading bar (a higher high followed by a lower low settlement) that’s known as a “reversal day” and has been the hallmark of several short term pricing peaks this year. If that pattern holds true, we should see WTI test support at $50 by early next week.
Gasoline prices have been the most volatile this month, and are facing a critical test of support around $1.60 when the November contract takes the prompt position next week. If that support breaks, there’s really not much on the charts to prevent a 20 cent drop in prices, and with US refineries coming back online and several postponing their fall maintenance, there’s a fundamental argument that favors a large drop as well. With the driving season behind us and cooler weather moving in, it seems like the best chance for gasoline prices to avoid a big drop will be for ULSD and WTI to keep moving higher.
Right on cue, Bloomberg had an interesting article this week suggesting that ULSD was driving the energy complex higher. While it’s hard to argue with that sentiment given ULSD futures are trading almost 25 cents higher than they were 2 months ago, Gulf Coast cash differentials have collapsed to pre-hurricane levels this week suggesting that the US plants are up to the challenge, and as the WSJ notes this morning, that fact may be making European refiners nervous longer term.
The international reaction to a referendum passed this week by Iraqi Kurds looking for independence will likely continue having some influence on oil price movements near term. Threats from Turkey to cut off the pipeline flows through which roughly ½ million barrels/day of oil from the region reaches the market helped push oil prices to multi-month highs earlier in the week, although some are questioning how long that blockade can really last.
The EPA dealt a 2nd blow to anyone bullish RINs this week, announcing that in addition to looking at lower obligation levels over the next two years, it was also considering allowing exported biofuels to keep their RINs, which would add to the options for US refiners to meet their renewable volume obligations. D6 ethanol RINs dropped to their lowest levels in 4 months on the news, although they did seem to find a temporary floor in the low 60s and ended the day around 66 cents.
In the 3 days since Monday’s strong rally lifted all prices, the energy complex has been divided with Crude and Diesel prices finding strength, while gasoline is facing heavy selling pressure in futures and cash markets. Inventory reports from the API and DOE supported the diverging behavior as inventory levels and export activity favor an unwinding of the strong gasoline spreads we’ve seen since Harvey hit Texas more than a month ago.
In addition to the inventory reports, the pressure from RIN prices picked up steam Wednesday, a day after the EPA announced it may lower obligation volumes for the next two years. Ethanol RINs dropped from the mid 70s to the mid 60s during the day, some 17 cents below where they started the week, adding to the negative sentiment for gasoline prices. WTI was aided by a spike in crude oil exports, which flew in the face of analysts who had been suggesting US Producers weren’t up to the task of filling the hole left in Harvey’s wake.
Total petroleum imports reached their highest level since 2011 last week, as cargoes dispatched in the wake of Harvey made delivery. It’s worth noting that 2011 was the year that the US flipped from a net importer of refined fuels to a net exporter, a trend that’s likely to continue once we’re past the short term disruptions.
The Jones Act is finding its way into the headlines again this week as the US scrambles to send resources to Puerto Rico. The challenge on the island however appears to be a lack of off-loading capacity due to port damage and lack of power, rather than a lack of available fuel vessels. In fact, reports suggest that Florida is getting extra supply from ships unable to offload their gasoline cargoes in PR.
While Maria, now downgraded from a hurricane to a tropical storm, moves away from the US, a new system is developing and is give a 40% chance of becoming the next named storm over the weekend near Florida.
As we near the start of the 4th quarter, perhaps the largest question for energy prices near term is whether the weakness in Gasoline, or the strength in Crude & distillates will prevail. Charts are favoring a push towards $55 for WTI and $60 for Brent, which could mean ULSD prices make a run at $2. On the other hand, RBOB gasoline futures look very weak technically, and are likely to drag on the entire complex for some time.
Notes & Charts from the DOE report.
Crude Oil Exports aka Capitalism in a single chart: Just give US producers an incentive, and watch what they can do.
Gasoline prices are falling this morning as data from the API and a new outlook from the EPA combined forces Tuesday to outweigh concerns about reduced runs from East Coast refiners as Hurricane Maria passes by. Crude oil and diesel prices are clinging to small gains as the industry data showed inventory declines for both.
The API was said to show a draw down in crude oil stocks of 1.1 million barrels, a diesel draw of 4.5 million barrels, while gasoline stocks rose by nearly 1.5 million. That report was enough to keep WTI and ULSD prices in the green overnight, while gasoline prices continued to fall, wiping out most of Monday’s big gains. If today’s EIA report confirms the API figures, it will be the latest sign that the post-Harvey recovery is moving along faster than many expected. Local terminal markets in the South East and Florida are already showing signs of filling up on regular gasoline, while premium supplies remain very tight and are expected to remain so for several more weeks.
RIN values dropped to their lowest values in 2 months after the EPA announced it was planning to propose reductions to the renewable fuel volume targets for 2018 and 2019. The announcement also seemed to help weigh on RBOB futures and crack spreads, as the cracks are now seen by some as a counterbalance to the RIN costs. The reaction feels a little strong considering the main reduction target is for bio-mass based diesel, although it could potentially include reductions in other categories – including the total renewables that includes Ethanol blending.
The outer bands of Hurricane Maria are hitting the outer banks of North Carolina today before that storm moves out to sea. While delays in crude oil deliveries caused by rough seas have caused 2 Philadelphia area refineries to confirm reduced run rates, it’s expected that those impacts will be measured in thousands of barrels for a few days, compared to millions of barrels for a few weeks like we saw with Harvey. Hurricane Lee is still hanging around in the central Atlantic but is fortunately not threatening any land masses. It may come as no surprise that September 2017 is now the most active month for Atlantic hurricanes on record based on 2 different measures. While there aren’t any other potential areas of development on the books right now, conditions remain favorable for another storm or two in October.
While still forecasted to stay out to the Atlantic and not make landfall on the North American mainland, Hurricane Maria is disrupting shipping channels as it churns out at sea. Northeast refineries are currently running at reduced rates as they await crude shipments that are being held up by the storm. New York gasoline futures felt the pressure of an anticipated near term shortage and rallied with conviction yesterday with gasoline adding 5.5 cents. WTI futures rallied in sympathy and finished the session at $1.50 higher. Those gains will likely be given back after shipping schedules and regional refinery runs return to normal.
Yesterday’s rally in diesel prices put the prompt month contract at levels not seen in two years. Accompanied by Brent crude futures which achieved the same milestone yesterday, the rally is being attributed to positive comments coming out of last week’s OPEC meeting. The cartel claims the production cuts which began almost a year ago are helping to balance the market. Turkey’s threat to “close the valves” on Iraq’s exports seemed to further inflame the market. Now whether any of this is actually true or not is anyone’s guess but the traders seemed to buy it and bought in on it. NYMEX ULSD added on over 2.5 cents per gallon on Monday, Brent gained over $2 per barrel.
The energy complex is coming off some this morning with RBOB down almost 1.5 cents, ULSD down 2.5 cents. A case can definitely be made for profit taking after yesterday’s jump; there’s no news yet on any shipments making it into the Delaware River area. The American Petroleum Institute’s inventory estimates are due out later this afternoon. Short term crude supply disruption and inventory estimate speculation will likely compete for today’s price drivers.
Most of the energy complex is reaching multi-month highs this morning, thanks to some wishfully bullish sentiment from both producers and speculators.
Oil prices seem to be getting a boost from Harold Hamm, chairman of one of the largest shale drilling companies in the US, who said in an interview that the EIA is exaggerating oil production estimates across the country, perhaps by as much as 500,000 barrels/day. On one hand, it would be easy to dismiss the comments as a billionaire trying to talk up his own book as few people in the world stand to gain as much as he does from rising prices, but on the other hand, it wouldn’t exactly be a shock if the EIA had another inaccurate estimate.
Money managers were decidedly bullish last week adding to their net long positions in all of the big 4 petroleum contracts. Brent reached its largest net long position for the speculative category since February, while RBOB hit its highest since 2014 and ULSD reached the most since 2012. While WTI did see an increase in net length, it’s merely hovering at an average level of speculative length. With the Brent/WTI spread already north of $6/barrel and crack spreads at 2 year highs, it seems like those speculators may need a new catalyst to continue pushing prices higher.
5 more drilling rigs were idled last week according to Baker Hughes, supporting Mr. Hamm’s theory that US production may soon reach a plateau. The question is if this latest push north of $50 is enough to get US producers to lock in prices to guarantee next year’s production.
Hurricane Maria is predicted to get uncomfortably close to the outer banks of North Carolina Wednesday before making a turn out to sea, meaning it should not be a factor for energy prices. It’s still unclear whether the marine terminals on St. Croix suffered major damage from the storm, but there is a report that the truck rack is operational, which is certainly a good sign.