Diesel Prices Are Struggling To Find A Floor After A Huge Friday Selloff Knocked The Wind Out Of Its December Recovery Rally

Market TalkMonday, Dec 19 2022
Pivotal Week For Price Action

Diesel prices are struggling to find a floor after a huge Friday selloff knocked the wind out of its December recovery rally. ULSD was up 5 cents overnight but has dropped to 2 cent losses in the early going, despite RBOB and WTI holding onto modest gains.

Another round of winter storms this week could negatively impact Christmas travelers, but - so far at least - aren’t stirring fears of spiking demand for heating supplies. While most of the headaches will come in the North and Eastern US, Texas is forecast to see single digit temperatures for the first time since the 2021 storm that crippled the region and knocked every refinery in the state offline for some period of time.

Money managers continue to be unenthusiastic about energy contracts, making large reductions in their net length (bets on higher prices) for ULSD, RBOB and Brent last week, while WTI and Gasoil contracts saw small increases. Open interest did increase on the week, but remains near 6 year lows as volatility and increased margin costs keep many on the sidelines. Speaking of which, take a look at the “Swap Dealer” positions for WTI in the chart below. Those positions have been shrinking steadily since January and reached their smallest level since July of 2017 last week, which suggests that domestic oil producers are hedging less and less of their future output. 

Baker Hughes reported the US oil rig count dropped by 5 last week, a 2nd straight decline in drilling activity, and perhaps yet another sign of the risk aversion by producers these days. 

The DOE announced the White House was taking credit for lowering gasoline prices Friday, as it issued a press release for a new purchase of 3 million barrels for the SPR, which amounts to just a little over 1% of the oil that’s been drawn down over the past 2 years. Whether or not this is just political theatre remains to be seen as details of the February auction have yet to be released.

As year-end approaches, we’re seeing rack prices in Texas plummet vs their spot markets as inventory holders try to minimize the impact of the state’s property tax laws that will cost 8-10 cents/gallon for anything sitting in a terminal. This annual phenomenon typically leads to some big drawdowns in oil inventories as importers will hold barrels off-shore until January to avoid paying that extra tax. The collapse of the spot/rack spreads is particularly notable in the West Texas markets, which have made their seasonal swing from famine to feast on supply along with several other major markets across the Southwest.

Corruption allegations against European and Qatari officials have taken some of the shine off of an epic World Cup finale, and Qatar is now the latest country to rattle the energy saber suggesting that the investigation could “negatively affect” security discussions, while stopping short of explicitly threatening natural gas supplies that are currently being negotiated. 

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Market Talk Update 12.19.22

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Market TalkFriday, Jul 19 2024

Summertime-Friday-Apathy Trade Influencing Energy Markets

Energy markets are treading water to start the day as the Summertime-Friday-Apathy trade seems to be influencing markets around the world in the early going. RBOB futures are trying for a 3rd straight day of gains to wipe out the losses we saw to start the week, while ULSD futures continue to look like the weak link, trading lower for a 2nd day and down nearly 3 cents for the week.

Bad to worse: Exxon’s Joliet refinery remains offline with reports that repairs may take through the end of the month. On top of that long delay in restoring power to the facility, ENT reported this morning that the facility has leaked hydrogen fluoride acid gas, which is a dangerous and controversial chemical used in alkylation units. Chicago basis values continue to rally because of the extended downtime, with RBOB differentials approaching a 50-cent premium to futures, which sets wholesale prices just below the $3 mark, while ULSD has gone from the weakest in the country a month ago to the strongest today. In a sign of how soft the diesel market is over most of the US, however, the premium commanded in a distressed market is still only 2 cents above prompt futures.

The 135mb Calcasieu Refinery near Lake Charles LA has been taken offline this morning after a nearby power substation went out, and early reports suggest repairs will take about a week. There is no word yet if that power substation issue has any impacts on the nearby Citgo Lake Charles or P66 Westlake refineries.

Two tanker ships collided and caught fire off the coast of Singapore this morning. One ship was a VLCC which is the largest tanker in the world capable of carrying around 2 million barrels. The other was a smaller ship carrying “only” 300,000 barrels (roughly 12 million gallons) of naphtha. The area is known for vessels in the “dark fleet” swapping products offshore to avoid sanctions, so a collision isn’t too surprising as the vessels regularly come alongside one another, and this shouldn’t disrupt other ships from transiting the area.

That’s (not) a surprise: European auditors have determined the bloc’s green hydrogen goals are unattainable despite billions of dollars of investment, and are based on “political will” rather than analysis. Also (not) surprising, the ambitious plans to build a “next-gen” hydrogen-powered refinery near Tulsa have been delayed.

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Market TalkThursday, Jul 18 2024

Refined Products Stanch Bleeding Despite Inventory Builds And Demand Slump

Refined products are trading slightly lower to start Thursday after they stopped the bleeding in Wednesday’s session, bouncing more than 2 cents on the day for both RBOB and ULSD, despite healthy inventory builds reported by the DOE along with a large slump in gasoline demand.

Refinery runs are still above average across the board but were pulled in PADD 3 due to the short-term impacts of Beryl. The Gulf Coast region is still outpacing the previous two years and sitting at the top end of its 5-year range as refiners in the region play an interesting game of chicken with margins, betting that someone else’s facility will end up being forced to cut rates before theirs.

Speaking of which, Exxon Joliet was reportedly still offline for a 3rd straight day following weekend thunderstorms that disrupted power to the area. Chicago RBOB basis jumped by another dime during Wednesday’s session as a result of that downtime. Still, that move is fairly pedestrian (so far) in comparison to some of the wild swings we’ve come to expect from the Windy City. IIR via Reuters reports that the facility will be offline for a week.

LA CARBOB differentials are moving in the opposite direction meanwhile as some unlucky seller(s) appear to be stuck long and wrong as gasoline stocks in PADD 5 reach their highest level since February, and held above the 5-year seasonal range for a 4th consecutive week. The 30-cent discount to August RBOB marks the biggest discount to futures since 2022.

The EIA Wednesday also highlighted its forecast for rapid growth in “Other” biofuels production like SAF and Renewable Naptha and Propane, as those producers capable of making SAF instead of RD can add an additional $.75/gallon of federal credits when the Clean Fuels Producer’s Credit takes hold next year. The agency doesn’t break out the products between the various “Other” renewable fuels, but the total projected output of 50 mb/day would amount to roughly 2% of total Jet Fuel production if it was all turned to SAF, which of course it won’t as the other products come along for the ride similar to traditional refining processes.

Click here to download a PDF of today's TACenergy Market Talk

Pivotal Week For Price Action