Escalation in Ukraine Creates Risk Premium, Reverses Last Week's Losses

Petroleum futures wiped out last week’s losses Monday as a risk premium appeared to be added back to the market following the escalating attacks in Ukraine and Russia. Overnight there was a bit of a sell the news effect after Ukraine’s first use of long range US missiles inside of Russia, although the modest losses have been erased this morning.

Monday’s rally keeps the energy complex in neutral technical territory short term with a symmetrical triangle pattern forming on weekly charts for both gasoline and diesel that suggests there’s a breakout in prices coming before year end but doesn’t give guidance on which direction that may occur.

A Bloomberg article Monday highlighted how US Gulf Coast refiners are taking advantage of Brazil’s strong economy and Mexico’s floundering refineries to ramp up run rates to their highest levels on record for this time of year. No word yet on if that strong export demand will encourage Houston Refining to delay its planned closure which is scheduled for Q1, but has already been delayed for a year once before.

Speaking of refinery closures, multiple reports in the past few days suggest at least 3 Russian refineries may be shutting down permanently due to repeated Ukrainian attacks, coupled with weak economics and sanctions making their owners unable or unwilling to complete necessary repairs and upgrades. In total those facilities account for just under 500,000 barrels/day of capacity, although they’ve been running well below those levels for some time.

RIN values have dropped back below the 70 cent mark this week, giving back their post-election gains as traders appear to bet that the new EPA will not be a proponent of higher biofuel blend requirements, while the limited moves suggest they’re also not convinced that a major overhaul of the RFS program is instore.

There are just 11 days left in the Atlantic hurricane season and after Sara broke up over Mexico this weekend, there’s nothing else on the NHC radar for the next week. The line of thunderstorms that swept across Texas and Oklahoma Monday didn’t result in any refinery flaring reports, although there were more than a dozen upsets reported at natural gas facilities across the state.