Oil prices are trying to turn the corner, yet there is still concern about oversupply. The week starts with a bit of risk-off, and the front-month June crude contract is acting like the weakness fears are still high and we could see this month trade negative due to high fears that we are still running out of storage. Yet there are signs that producers have cut back, and signs that demand destruction is bottoming and is even lending support to the back end of the oil curve. The sense is that there is a firm conviction that oil prices will recover yet how many bankrupt producers will be able to take advantage of it?
Gasoline demand, as we noted, seemed to turn the corner two weeks ago. Gas prices at the pump are rising accordingly but are still at a decade low for this time of year. Still, there is drama in the gas market as the summertime blends are supposed to be coming to the market. The API has asked for waivers for some refiners, yet ethanol producers are crying foul.
Ethanol producers have struggled as gasoline demand has dried up. The Renewable Fuels Association reported about 70 ethanol plants nationwide were shut down, nearly 70 more plants had reduced their operating rates, leaving about 48% of the industry’s total production capacity offline because of a 46% reduction in sales. The Renewable Fuels Association reported that a coalition of ethanol and farm groups today sent a letter to the Environmental Protection Agency opposing the American Petroleum Institute’s recent petition requesting reconsideration of the 2020 Renewable Fuel Standard (RFS) final rule.
The API claims reconsideration of the 2020 RFS rule is necessary in light of the coalition’s recent Tenth Circuit court victory that overturned small refinery exemptions illegally granted by EPA. The successful Tenth Circuit court challenge was brought against EPA by the Renewable Fuels Association, National Corn Growers Association, National Farmers Union, and American Coalition for Ethanol. Specifically, API argues that the 2020 RFS rule should be revised to eliminate measures that prospectively “reallocate” RFS blending obligations expected to be lost to refinery waivers. API claims reallocation of expected waivers is no longer needed because the Tenth Circuit decision should significantly curtail the number of waivers granted. However, EPA has not yet confirmed that it will implement the tenets of the Tenth Circuit court decision nationwide, meaning reconsideration of the 2020 RFS rule would be woefully premature. “There is no basis for revisiting or modifying EPA’s current approach until EPA acknowledges that the central tenets of the Tenth Circuit’s decision are appropriately applied throughout the country,” the groups wrote.
In fact, the 2020 RFS volumes should not be adjusted downward to remove reallocated volumes even after EPA applies the Tenth Circuit court decision nationally, according to the coalition’s letter. “As noted by the Court, EPA’s recent abuse of its small refinery exemption authority has significantly harmed the U.S. ethanol industry. Indeed, nationally, more than four billion gallons of 2016-2018 renewable fuel volume requirements were lost due to EPA’s illegally issued small refinery waivers. Applying the Tenth Circuit decision nationally while leaving the 2020 RFS rule intact would begin to restore a small amount of the renewable fuel volume requirements lost to past small refinery exemptions; still, doing so would come nowhere near fully redressing the demand destruction wrought by the exemptions.”
Oil is still going through a process that will lead us to a bottom. Reports that Russia and Saudi flooded the market ahead of the OPEC Plus deadline is a concern. Yet demand upticks mean that demand has nowhere to go but up should support prices.
Natural gas looks like it should get a bounce. Andy Weissman of EBW Analytics says that, "A bullish weekend weather shift, decisions by many states to partially reopen, and signs that declines in production are accelerating could push gas prices higher early in the week. The potential that EIA will report a huge storage build Thursday, though, could push them back down."