It’s The Last Trading Day For 2023, Energy Markets Are Still Searching For Direction With Small Gains For Gasoline And Crude Oil Futures

It’s the last trading day for 2023, and energy markets are still searching for direction with small gains for gasoline and crude oil futures, while diesel sees small losses in the early going. We saw heavy selling Wednesday after US oil output held at a record high, and refinery runs continued to increase and push inventories higher, but prices still appear range-bound for now. 

Looking ahead to 2024, shipping chokepoints will be a major story with the Panama Canal still reduced to roughly 50% of its capacity, which was forcing more ships to transit through the Suez Canal before attacks in the Red Sea diverted many of those shipments. The world’s two other key shipping straits are thankfully quiet for now, but Iran just last week attacked a tanker off of the Indian coast so the Strait of Hormuz could certainly soon come back into the forefront, and it’s not too hard to imagine China could see these canal blockages as the perfect time to take action in the South China Sea which could end up disrupting movements through the Malacca strait.

New refining capacity also looks to be a major needle mover this coming year with the huge new Dangote refinery in Nigeria beginning operations this month, but not yet making on-spec products.  Whether that facility and Mexico’s new Dos Bocas refinery can come online in a meaningful way will have a heavy influence on the supply condition of the entire Atlantic basin and could create even bigger swings in the US export market than we saw this year.

The return of contango in oil markets after nearly two years of backwardation will also influence markets around the world as shippers are once again incentivized to store barrels.  Note the steady increases in Cushing OK inventories in the charts below for an example of this phenomenon at work. With US exports surging and OPEC struggling to keep its production limited, storage capacity could once again command a premium this year. 

In other words, there seems to be plenty of oil production and refining capacity in 2024, but the ability to transport that supply to where it’s needed is much less certain. 

Those challenges in transportation are evident within the US as well, with both PADD 2 and 3 showing swelling inventories as refiners crank up run rates, while PADD 1 inventories remain low as the options to ship products to the population centers on the East Coast are limited by pipeline capacity and Jones Act vessel restrictions. The ability for refiners to ship barrels out of the center of the country in whatever way they can continue to be a major story for next year and will likely determine whether or not some facilities are forced to cut runs, particularly if the new refining capacity in Africa starts pushing more barrels from Europe to the East Coast. 

So far, facilities in the Mid Con don’t seem intimidated as PADD 2 refinery runs surged to a record high last week, at a time of year when we typically see things slow down. PADD 4 saw a sharp reduction in run rates after yet another operational upset at Suncor’s beleaguered refinery outside of Denver, which is facing new challenges to its air permits that could eventually lead to that facility closing for good.

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