DOE Week 33 - 2019 Report

ULSD futures have dropped 80 cents in 9 days as the market has acted as if it’s only worried about a slowdown in demand, and not so much the lingering concerns about supply. After the January lows acted like nothing more than a speed bump this week, the next target on the charts is the December lows around $2.78, roughly 10 cents below the lows set this morning. That is about the only thing on the charts standing in the way of a drop to the $2.50 range, although we’re set up for at least a short-term bounce after this latest wave of selling.

It’s worth noting that the big physical players aren’t figuratively buying the selling in futures, and are instead literally buying up prompt barrels, and keeping cash prices for distillates above their January lows so far. The relaxation of backwardation seems to be playing a part in the stronger basis differentials in the front of the curve, and markets in the Midwest that had been trading 40-50 cents below futures during the winter doldrums are now only seeing single digit discounts. 

A record-setting cold snap in the Northeast US would typically be cause for at least a brief jump in diesel futures, but the severe weather forecast this weekend is apparently seen as too little, too late, and too short to offset the much warmer than normal winter that has curbed heating demand and alleviated so many concerns about another supply crunch last fall. That doesn’t mean this storm won’t come without challenges, as vessel delays, freezing equipment and power outages are all still a possibility, but since temps will be back in the 40s by Sunday, that may be an afterthought by Monday morning.

The January payroll report smashed most expectations, with more than 517,000 jobs added during the month. That good news for the economy could end up being bad news for markets that had rallied the past couple of days in hopes that the FED might take it easy on the tightening. 

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The move also came despite a big drop in the US dollar and surging equity prices after the Fed Chair’s press conference Wednesday which was apparently viewed through rose colored glasses by the easy money crowd. 

It took 12 trading days for ULSD prices to rally from $2.92 to $3.58 in January, but just 6 to give all 66 cents back. Sellers wasted little time once the weekly trendlines broke Wednesday completing the cycle and pushing prices right back to the $2.92 range. This sets up a potentially pivotal test for the balance of the week, with a break and hold below the January lows setting the stage for a run at the December lows of $2.76, while a hold here could set up a period of sideways trading within the confines of the January range. 

B100 prices have also dropped around 70 cents/gallon over the past week as bio blends race lower to stay competitive with the sudden drop in diesel prices.  Adding to the challenge for bio-blenders that sell a $6 fuel in a $3 diesel market are RIN values that have seen their first significant selling in 2 months, lowering the subsidy for blending those fuels, while LCFS credits remain stuck in the low $60s which is less than 1/3 of where they were 2 years ago. 

Speaking of government subsidies influence on bio-fuels, the largest renewable diesel producer in the US announced plans to shift direction and make its next major investment in Sustainable Aviation Fuels as the latest blenders tax credit package offers up to a 75 cent advantage for SAF blenders vs RD and Biodiesel, while all 3 fuels will be competing for the same feedstocks. 

Refinery runs dipped last week as a large reduction in PADD 5 (west coast) runs offset a large increase in PADD 2 (Midwest). The PADD 5 run rate fell to a 2 year low following several unplanned events coinciding with the annual spring maintenance season as facilities tool up to produce summer grade gasoline. We had already seen San Francisco spot gasoline differentials jump nearly 40 cents/gallon over the past week, and LA spots followed suit Wednesday, jumping to a 3-month high north of 36 cents over futures.

The DOE’s weekly report showed inventories continuing to build despite the dip in refinery runs, with distillate demand the ugly number on the week. Even though diesel inventories remain uncomfortably low across most regions, days of supply are approaching average levels thanks to a very weak start to the year for diesel consumers. There’s no doubt that unseasonably warm winter weather on the East Coast (prior to this weekend anyway) has contributed to that weak demand, and the weeks of rain on the West Coast certainly didn’t help, but gauging the market’s reaction, there’s also some fear that the slump in diesel demand is an indicator of slowing economic activity. 

Gasoline demand meanwhile saw a healthy increase for a 3rd straight week, but continues to hold below the 5-year average, and has only outpaced 2022 numbers 1 out of 4 weeks so far this year. Gasoline exports remain near the top end of their 5-year range, while distillate exports have been steady near the 5-year average so far this year. The severe weather that swept the gulf coast refinery zone may have limited the exports over the past two weeks however, so don’t be surprised to see a big drawdown if there’s a backlog of ships that clears in February. 

More bad news for Colorado. Yesterday the Suncor refinery reported a leak, which is impressive considering it hasn’t been operating since the Christmas blizzard, which will no doubt add time and headaches to their repair process. Then overnight the P66 refinery in Borger TX, which has pipeline access to supply Colorado, was said to shut units for at least the 3rd time since being damaged by that same storm. 

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Both products pulled back in the overnight session after the API reported more inventory builds across the board last week. Oil inventories were said to increase by 6.3 million barrels, while gasoline stocks were up 2.7 million and distillates were up 1.5 million. The rise in oil inventories is likely a sign that refinery runs remain below expected levels for a 6th week following the Christmas blizzard and several other unplanned maintenance events. The fact that refined products continue to build despite those slower refinery runs is likely a sign that demand remains in the winter doldrums, although it’s impossible to say how much is caused by the parade of winter storms, and how much is a sign of a slowing economy.

The EIA’s weekly report is due out at its normal time this morning, and should give us a good update on the status of refinery output. Speaking of which, Exxon noted in its earnings call that the Beumont refinery expansion is on pace to bring another 250mb/day of output online in Q1, which is the largest increase in capacity in a decade for the US, and the first of more than 200mb in 4 years. That’s great news for those hoping to see some relief in the supply network this year, but the bad news is that we’re expected to lose another 250mb/day later this year when the Houston Refining facility is shuttered, and another 130mb/day early in 2024 when P66 converts its Rodeo CA facility to RD production 

OPEC & Friends are meeting today to discuss their output quotas. That meeting has been largely dismissed by many in the market since it’s being held virtually, which has become a symbol that the cartel is not planning to make any changes to its agreements. In addition OPEC’s president is making it clear that they want to see more data on production and consumption before deciding on a policy change.

San Francisco gasoline prices were already the most expensive in the country after a basis rally last week to a 30 cent premium vs futures as the West Coast begins the spring RVP transition. Bay Area basis values jumped again Tuesday after reports of a fire at the Martinez refinery, although later it was suggested that fire would not impact operations at the plant as it occurred out equipment that was no longer in service.   

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