Diesel Prices Hit Lowest Level Since January 2022 Amid Technical Support Failure, Shortages Persist in Southwest US
Diesel prices are trading at their lowest levels since the first week of January 2022 this morning after technical support around the $2.50 level failed to hold in Tuesday’s session, dragging the entire energy complex sharply lower. Tuesday’s US Consumer confidence report showed the lowest reading in 9 months, adding to the bearish sentiment for energy and equity markets.
Contango is back: The drop in prompt prices for distillates coincides with a collapse in the forward curve with prices for November and December ULSD currently trading 2 cents higher than May and June contracts. This time last year, prompt ULSD was trading at a premium of more than $2/gallon above 1 year forward values and today that premium has dropped to less than a penny/gallon as the world has finally figured out a work-around to the Russian supply conundrum.
Just don’t tell people in Arizona or New Mexico that diesel prices are cheap. Rack prices in those states continue to be offered north of $3.50/gallon as shortages across the Southwestern US persist. West Texas and Nevada are seeing similar price spikes as pipeline resupply options simply aren’t able to make up for the refinery downtime in the region, which has seen a few other smaller facilities convert to renewables production or shut down completely in recent years. Arizona’s low RVP CBG grade gasoline is going for $4.50/gallon in Phoenix, while spot prices for that boutique grade in LA are trading at $2.90.
While not nearly as extreme as what we’re seeing in the Southwest, values for diesel in the Group 3 market have been on a rollercoaster ride the past two weeks, with differentials fluctuating by 10-20 cents daily with premiums north of 40 cents and below 20 being talked on any given day. Here too, refiners trying to supplement supplies during maintenance, with fewer options now than in years past continues to be the underlying theme.
The Superior Wisconsin refinery is back operating under new ownership 5-years to the day after it blew up and forced a partial evacuation of that town. The refinery rebuild took 2 years longer and cost 3 times the original expected amount. Given the relatively small size and isolated location of that facility, don’t expect it to have any noticeable impact on spot prices in the region.
An explosion Tuesday at an asphalt facility in Lemont IL killed 1 worker and sent another to the hospital. That facility is adjacent to Citgo’s Lemont refinery, but refinery operations were not expected to be impacted. The terminal rack was temporarily taken offline following the explosion, but was brought back online by the afternoon.
The API reported an inventory decline of 6 million barrels for crude oil last week, even though more sales from the SPR continue, while gasoline stocks dropped by 1.9 million barrels and distillates increased by 1.7 million barrels. That report probably helps explain the relative strength for RBOB and WTI futures vs ULSD this morning. The EIA’s weekly report is due out at its normal time.
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View All“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.