Diesel Futures Are Trying To Lead Another Move Higher To Start The Week With The October ULSD Contract Up A Nickel So Far

Market TalkMonday, Sep 11 2023
Pivotal Week For Price Action

Diesel futures are trying to lead another move higher to start the week with the October ULSD contract up a nickel so far, reaching a new 8-month high at $3.3510. RBOB futures are ticking slightly higher on the day, but remain well below their Friday morning highs, while WTI is still trading modestly lower.

Hurricane Lee will be a big story all week as it slowly crawls towards the East Coast. Most models keep this storm off the coast as it moves north this week, although a landfall from New Jersey to Maine is still possible this coming weekend so it will remain front page news.  The odds of a strike on northeastern Maine look to have increased over the weekend, as have the chances that the Irving refinery in St. John NB will take a direct hit. If there’s a silver lining to the potential for that refinery to being hit by a major storm, it would be that the facility already had a turnaround planned starting this week, so the market isn’t planning on those barrels anyway. 

Money managers were piling into WTI contracts as prices hit their highest levels of the year last week, jumping on the bullish bandwagon with bets that the rally will continue and pushing net length to the highest since June 2022. The large speculators also added to their length in Brent crude, but reduced their length in products, with ULSD, RBOB and Gasoil contracts all seeing slight declines on the week. Swap dealers saw an active week with a healthy increase in net short positions in WTI, which suggests that some producers are jumping in to hedge future output at current values.

Baker Hughes reported an increase of 1 oil rig drilling in the US last week, the first weekly increase since June after reaching the lowest level since February 2022 the week prior.   Natural gas rigs declined by 1 on the week, setting a new 20 month low.

That didn’t last long: The Group 3 market’s turn in the spotlight with a trade north of $1/gallon over RBOB futures for prompt UNL lasted less than a day with values dropping sharply Friday to “only” about 40 cents over futures. West Coast markets meanwhile continue to carry hefty premiums as tight inventories remain a theme as we approach the last few weeks of summer-grade products for gasoline, and diesel stocks remain tight with resupply of RD looking scarce due to weather-related delays in the Panama Canal.

An explosion at the ADM Ethanol plant in Decatur Illinois sent several workers to the hospital overnight. That facility is listed as the largest ethanol production plant in the country at 375 million gallons/year (24mb/day) and accounts for more than 2% of total US ethanol production capacity according to the EIA’s energy atlas. It’s unclear at this point what if any impact there is on production, but reports suggest it’s the third fire in the past 6 months at the facility, and the others have not created a big stir in ethanol markets. 

Marathon’s Texas City (aka Galveston Bay) refinery had another fire last week, with reports suggesting this latest in an unfortunate string of upsets at the country’s 4th largest plant will keep an FCC unit offline for at least a week. The event was downplayed in a filing with the TCEQ Friday that only mentioned 2 hours of unplanned flaring. That story was given credit for some of the early buying in product futures Friday, but gasoline prices quickly gave back gains, suggesting the FCC downtime wasn’t seen as much of a factor longer term.

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Market Talk Update 09.11.2023

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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Pivotal Week For Price Action