Diesel Prices Fell Out Of Bed Wednesday Dropping More Than 20 Cents At One Point To A 5 Week Low
Diesel prices fell out of bed Wednesday dropping more than 20 cents at one point to a 5 week low, even as gasoline and crude prices hold around break even for the day. There’s not a clear reason for the big drop in diesel while WTI and RBOB are neutral, but it appears that recession/demand fears may outweigh supply fears as fuel inventories in the US and abroad show signs of recovery.
US stock markets had their worst day in more than 2 years Tuesday following a discouraging inflation report that doomed hopes of the FED easing up on their plans to raise interest rates and tighten the money supply anytime soon. Diesel prices have had a negative correlation to the S&P 500 in recent months, so it doesn’t seem there’s an immediate connection between the selling in the asset classes, but there’s no denying that a recession would take a heavy toll on distillate demand.
A report by a major US investment bank suggested that European natural gas prices would be cut in half this winter as widespread efforts to solve the Russian energy shortages are proving successful. If that prediction plays out, it suggests a lower need to switch to diesel fuel as a supplemental option for electricity generation.
Ethanol prices have surged this week, alongside corn prices following a bullish crop report from the USDA. Another factor to watch closely in ethanol markets is a looming railroad strike that could hamper the primary transportation method for numerous commodities, including grain alcohol that goes into your fuel tank. The gasoline price vs Ethanol, both gross and net of RIN values, has fallen to its lowest level of the year as gasoline prices have come under pressure while ethanol rebounds.
The potential railroad strike would be a double-edged sword for diesel prices, both reducing the 2nd largest demand source for diesel, while also putting a key supplemental supply source at risk for markets that can’t be fully stocked by pipeline or waterborne options. There is a possibility that some of today’s action in ULSD futures could be related to major railroads unwinding fuel hedges if they now anticipate their actual consumption to be below expected levels, but there’s no way to prove whether or not that’s happening.
The API reported a large build in US commercial crude oil stocks of 6 million barrels last week, but since the SPR was drawn down by more than 8 million barrels, the total oil inventories in the US actually fell again during the week. Distillates increased by 1.7 million barrels while gasoline stocks declined by 3.2 million barrels, which looks like it’s contributing to the big price disparity between products this morning. The EIA’s weekly report is due out at its normal time this morning.
The NHC gives a 70% chance that we’ll see another named storm in the Atlantic this weekend, which would be named Fiona. Most early models show this system turning north and east and avoiding a US Landfall, but a few still leave the door open for this storm to get into the Gulf of Mexico and threaten oil production and refineries, so it can’t be dismissed completely yet.
Click here to download a PDF of today's TACenergy Market Talk.
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“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
Click here to download a PDF of today's TACenergy Market Talk.
No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.