If you were wondering why distillate spreads improved over the last month in Europe, apparently there has been a unique demand situation heading over from Asia — prominently China — as well as Latin America.
KBC Energy Economics weekly oil comment on Monday notes, for example, how shortages of diesel in China have been bleeding through into the overall global supply picture: Read more
Weekly US energy inventory data release on Wednesday confirmed the unbelievable. US petroleum stocks rose in the week despite especially cold weather in the region during the period.
Meanwhile, Dennis Gartman of the Gartman Letter draws attention to the fact that aggregate inventory rose by 8.9m barrels, amongst the largest weekly aggregate increase ever. Read more
Recent cold weather in the northern hemisphere may be putting pressure on natural gas and rock-salt supply, but there’s one imbalanced market where the big chill is probably very welcome indeed.
We’re talking here about the refining business and related oil products market. An overhang of distillate stock due to poor demand over the past year put significant pressure on refining margins, leading many facilities to mothball or shutdown capacity. Read more
Last Friday, what many in the energy market had long suspected might happen, happened.
Valero, the largest independent refiner in the US, was forced to close another 200,000-plus barrel-per-day refinery — this time, its Delaware City unit — due to a lack of demand. The closure comes just three months after Valero shuttered its 235,000 barrel-per-day Aruba refinery in the Caribbean. Rival Sunoco, meanwhile, shut down a 150,000 barrel per day facility at Eagle Point in New Jersey in October.
These closures reflect just how badly the sector is doing, a fact which has also shown through in share prices: Read more
Oh my. We hope you’re sitting down because the following might come as a bit of a shock.
On Tuesday Goldman Sachs’ commodity team admitted they may have got something wrong: Read more
US distillate demand data for August tell a bleak tale, according to Barclays Capital. The latest monthly data available , BarCap analysts report, came out at 3.38mb/d, the lowest reading recorded since July 2000.
The year-on-year rate of decline, meanwhile, was a very significant 7.5 per cent, only marginally better than the 8.9 per cent recorded between January and July. Initial data for September and October traced a very similar picture, according to the analysts. Read more
Michael Shedlock of Mish’s Global Trend Analysis flags up a rather worrisome review by some concerned retired auditor folk on the situation facing the City of Houston in Texas, USA.
Indeed, according to Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton and Tom Roberts, CPA, Retired Partner at Fitts Roberts, Houston may be bankrupt. Read more
When Opec first started cutting crude production back in October, one of the immediate effects on the market was a pullback in the supply of heavy sour crudes.
As we noted before, this is because Saudi Arabia, Opec’s largest and most proficient swing producer, is mainly a supplier of heavy sour crudes. Read more
WTI crude fell through significant support on Thursday, having traded firmly range-bound since the beginning of August.
As can be seen in the chart below from Stephen Schork of the Schork Report on Tuesday, the contango in the WTI Nymex crude market has weakened over the last few months quite substantially:
Hat tip to Morgan Downey, author of Oil 101, for the following chart reflecting the still ongoing over-supply issues facing energy and tanker markets.
Europe’s largest independent refiner, Swiss-based Petroplus, announced a capital raising on Wednesday consisting of a $400m from a senior-note issue, a $150m convertible bond issue and a CHF290m new share issue to boost the firm’s capital and support its acquisition campaign.
Although, judging by the CFO Karyn Ovelmen’s statement, it might have more to do with the former than the latter. As Ovelmen stated on Wednesday:
In addition, the rights issue will increase our short term liquidity and provide balance sheet flexibility to support our business strategy, including value-enhancing acquisitions.
Stephen Schork of the Schork Report sets out the case very succinctly on Friday:
Thus, while we were led to believe that demand for oil was rising in the second quarter, hence the justification for that 40 percent surge on the NYMEX, we now have the balance sheets from Exxon, Shell et al. that prove it was a lie. Read more
WTI oil fell more than 5 per cent to $63 per barrel on Wednesday after US inventory data showed a much higher than expected build in crude stocks. Analysts had been expecting inventories to draw of 1.5m barrels, compared with the actual increase of 5m barrels.
As BNP Paribas’s Harry Tchilinguirian points out the rise came largely due to an unexpected rise in imports (our emphasis):
US crude stocks bucked expectations by posting a 5 mb build this week. The consensus was looking for a 1.5 mb draw amidst still depressed crude imports and refinery runs holding even. However, refinery runs pulled back by the week ending 24 July in sympathy with declining refining margins. Crude imports posted a strong gain, increasing some 820 kb/d to 10 mb/d and allowing a build in inventories. The jump in crude oil imports came as a surprise after several weeks of imports trending in the 9 to 9.2 mb/d range. The jump in imports was about evenly split between the West and Gulf Coasts, with potentially delivery of floating storage boosting the numbers on the US Gulf Coast. With this week’s build, US crude stocks end at 348 mb, over 52 mb above last year and over the upper limit of their recent five-year range. For the first half of July, the NYMEX futures 3:2:1 proxy for refining margins had come considerably down, trading mostly below $8/Bbl (compared to double digits in June). And given a rising surplus in product inventories, economics and discretion were probably at work behind the moderation in runs. Throughputs on the week fell 170 kb/d to 14.6 mb/d, leaving nation-wide utilisation rates of refining capacity at 84.6%.
From BP’s Q2 results on Tuesday:
Indicator refining margins in the third quarter to date have been lower than in the second quarter and substantially below 2008 levels. Refining availability is expected to remain higher than in 2008, but otherwise the outlook continues to be challenging with high distillate inventories and continuing low demand.
Francisco Blanch, commodities strategist at Merrill Lynch, observes in a recent note to what extent the distillate overhang has now ironically become the primary driver of gasoline strength, and to what degree refineries are switching over to gasoline-max mode to try and make-up for the shortfall:
Refiners are switching out of heating oil into gasoline. Paradoxically, the strength in gasoline emanates from the weakness in the mid distillate complex. Refiners have been cutting crude runs to deal with imbalances in the petroleum product markets. They also started to switch crude distillation yields from heating oil to gasoline, reducing heating oil yields from a peak of 32% to 27% at present. We believe this trend could continue pushing US gasoline yields at least 4% higher this summer. In our view, this should help rebalance the product markets, pushing gasoline supply up over the next 3 months.
The issue of floating storage is causing a spirited debate within the energy trading community.
You see, time-spreads are improving — in energy speak that means the curve is flattening, and the contango is abating. On a theoretical level that implies it is no longer economical to store crude oil for the purpose of profiting from the ‘contango trade‘. This is especially so for crude being held in more expensive floating storage. Read more
Stephen Schork of the Schork Report sums up the energy demand picture in the US succinctly on Thursday:
So there you go, refiners did not make a lot of product last week because demand is in the toilet.
Here’s the front end of the forward curve for both Nymex gasoline and heating oil futures.
As can be seen gasoline is now severely backwardated at the front-end of the curve, while heating oil futures (aka distillate) are still firmly holding on to contango. The flip into backwardation for gasoline happened earlier this month, coinciding with the rampant ascent in the price of US RBOB gasoline futures, which last week hit six-month highs of $1.70 a gallon. Read more
First there was Flying J which filed for Chapter 11 bankruptcy in December, 2008, then there was Lyondell Basell, which filed for Chapter 11 bankruptcy in January, 2009.
And now, the pressure of challenging distillate margins and low demand appears ready to take a toll on some other very prominent independent refiners. Read more