Diesel Prices Rally on Technicals, Tight Inventories
We’re seeing another reversal Thursday with ULSD prices rallying 6 cents in the early going after dropping more than 20 cents in the past week. The bounce seems to be driven more by technicals than fundamentals after prices held support just north of the $3 mark Wednesday, although tight inventories could also be playing a role. WTI is also seeing a bounce after its biggest weekly sell off in 4-months and is currently holding just above the $80 mark while gasoline prices are struggling to keep pace so far.
US oil output ticked up to 12.7 million barrels/day last week, reaching the highest mark since the start of the pandemic forced a rapid shutdown of many wells, and keeping the country on pace to set a record for annual production this year. The increasing output despite the consistent drop in drilling rigs is yet another testament to the ingenuity of the industry to continue leading through technological advancement, despite many concerns that legacy well rates are due to drop off. This increase in output is also a result of the shift to more off-shore drilling (which has higher output per well than on-shore fracking) over the past 2 years as the world has come to the realization that oil demand isn’t going away for a very long time.
Gasoline inventories remain well below average across the country, with all 5 PADDs holding below their 5-year seasonal average. The East and West Coasts (PADDs 1 & 5) are both hovering at the bottom of their 5-year range leaving them in a precarious position until we get past the fall RVP transition.
The Midwest (PADD 2) remains the only region in the country with diesel inventories that are at or above average for this time of year, while all others are running near the low end of their 5-year range. West Coast diesel inventories (and by extension the total US diesel demand estimate) are showing an artificially low number since the DOE’s survey still does not have a place to report weekly stats on renewable diesel.
Refiners seem to be doing everything they can to keep up with the low domestic inventories and steady export demand, with throughput rates remaining above average despite the drop in capacity over the past few years. We are seeing numerous small disruptions keeping several plants from reaching max output, and the concern is that we could soon see more disruptions with several fall turnarounds and the peak of hurricane season just a few weeks away.
California doesn’t get hit by hurricanes and has only had 3 tropical storms make landfall in recorded history, but we might get a 4th early next week. Hurricane Hilary formed off the Mexican coast yesterday and is expected to rapidly intensify into a category 4 storm by Friday, before losing steam rapidly as it approaches land. Yesterday the forecast path had the storm making landfall as a tropical storm near LA. This morning the center of the forecast cone has landfall happening in Mexico. Wherever it hits, the system is expected to bring heavy rains to California, Arizona and Nevada and we can’t yet rule out more disruptions to LA-area refineries. In other words, Hilary is scaring lots of people but looks like she’ll fall apart rapidly just in the nick to time to prevent too much damage from being done to our country. Sounds familiar.
In the Atlantic basin all 3 systems being tracked by the NHC have improving odds of development today. The two storms over the open Atlantic are both given 60% odds of being named this week, but both look like they should be moving north just enough to prevent a threat to the US, while the system in the Gulf of Mexico is given 30% odds of becoming a named storm next week.
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.