Energy Markets Lower To Finish February

After a 1 day reversal rally, energy markets are moving lower again to start the finish of February trading.

March RBOB and HO contracts are expiring today, so look to the April (RBJ and HOJ ) contracts for price direction if your regional market hasn’t already shifted. Of course, the March/April RBOB roll brings with it the change from the Winter to Summer specifications, which means prompt futures prices will be increasing around 22 cents/gallon while cash markets around the country will see substantial discounts to offset that move until the physical change to the summer-grade products occurs.

Diesel futures meanwhile are seeing the opposite effect as the roll to April ULSD takes out another 5 cents or so of the backwardation priced between months. We have and will see basis spreads tick higher to offset some of that drop when trading resumes next week..

The potential tariffs on Canada and Mexico look like they’ll loom large over the industry for another weekend, with numerous misleading statements this week adding to the confusion. At this point, it appears that 10% tariffs on Canada’s energy imports and 25% tariffs on most other items will begin on March 4th, unless negotiators can hammer out a deal by Monday.

The largest volume impact of the pending tariffs comes from Canada’s oil sales to the U.S., which make up roughly 60% of all the international oil the country consumes. Western Canadian Select is trading around $58/barrel, roughly an $11/barrel discount to WTI. If the tariffs take effect, one option is that Canadian producers may reduce their price by around 10% to offset that tariff, which would mean a discount to WTI of around $17/barrel, which certainly isn’t ideal for a producer, but it’s a spread they’ve lived with in the past and it’s likely that Mid Con refiners will shoulder some of that cost since their alternatives are limited after decades of building their facilities around discounted Canadian grades. If the Canadian government really wanted to negotiate, they could simply halt oil flows to the U.S. temporarily, which would cause most Mid-Continent refiners to have to slow rates, but it doesn’t seem likely that will actually happen.

The most immediate impact on refined product supplies will come in New England where Irving Oil is the primary supply option for several terminals from Maine to Connecticut. Communities near the border will also see an immediate impact as suppliers scramble to find domestic options that are less than the roughly 20-25 cent/gallon cost of the 10% tariff, but producers and shippers will be leery of making any commitments given the history of a trade deal coming at the last moment.

For Gulf Coast refiners, Mexican crude imports have been dwindling for years, so the big question will be whether Mexico will retaliate with tariffs on their fuel imports, which now account for a large portion of U.S. Gulf Coast production. Given the recent water-in-crude problems that has further hampered Mexico’s already struggling refinery sector, they seem to be negotiating from a position of weakness, whereas in the energy field, Canada’s supply gives it more leverage.

Much ado about nothing? Congress voted to repeal the federal fee on methane emissions for those who exceeded the industry limits. Of course, the industry limits still exist, so while the fee is going away, the mandate on restricting those emissions is not.

P66 reported another upset at its Borger TX refinery that’s become the leading refinery in the state for TCEQ filings. The latest incident was caused by a loss of steam from a 3rd party provider which impacted an FCC and Sulfur Recovery unit.