Energy Futures Are Off To A Strong Start Thursday, With ULSD Leading The Push Higher Trading Up Nearly 6 Cents In The Early Going

Market TalkThursday, Jan 25 2024
Pivotal Week For Price Action

Energy futures are off to a strong start Thursday, with ULSD leading the push higher trading up nearly 6 cents in the early going vs 3 cent gains for RBOB. Despite being stuck in the midst of the winter demand doldrums, and plenty of morning head-fakes early in the year, both ULSD and RBOB futures are looking bullish on the charts, with a strong spring rally looking possible IF they can hang on to their current gains and press through the high end of their winter range this week. 

As expected, last week’s storms had a noticeable impact on refinery runs across the middle of the country with PADDs 2 and 3 accounting for roughly 1 million barrels/day of declines.  We also get to see why cash markets around the country have been unimpressed by the refinery run reductions as despite the cold snap, refiners are still producing at about the same rate as they were the past 2 years at this time, and since most facilities are already getting back to normal operations, the supply overhang in many regions looks set to continue near term. 

That excess is most notable in distillate markets, where for the first time in nearly 14 months all 6 of the major US spot markets have prompt ULSD differentials trading at a discount to prompt HO futures. The Group 3 market is getting the worst of it at the moment, falling to a 50-cent discount to futures Wednesday, knocking $20/barrel off of the diesel crack for local refiners.  The 40-cent discount to USGC prices has flipped some inland rack markets like DFW on their head as those with trucks can take the trip north to Oklahoma to save $3-4k per load. 

It wasn’t just oil refineries that felt the impact of the cold weather last week. US ethanol production dropped by more than 20% on the week as facilities across the middle of the country struggled with Winter’s wrath. Ethanol prices continue to hold near 3-year lows despite the drop in output suggesting that production won’t stay offline for long.

Oil production also took a million barrel/day hit last week as wells froze in parts of the country, most notably North Dakota’s Bakken fields. State officials estimate it will take 3 more weeks to bring most wells back online, but increased imports from Canada seem to be enough to eliminate any fears of shortages during the downtime.

Valero led off the Q4 earnings releases for major refiners this morning with the expected decline in margins due to rapidly shrinking crack spreads after 2 phenomenal years. The traditional refining segment saw earnings of $1.6 billion, vs $4.3 billion in Q4 of 2022. The company’s RD earnings were slashed by 2/3’s despite (or perhaps because of) volumes increasing by roughly 50% during the year. One bright spot came from the company’s ethanol facilities that earned nearly $190 million, up from close to break-even a year ago as lower corn prices more than offset the drop in ethanol values. The company also noted its SAF project at its Port Arthur RD facility was on pace to be completed Q1 of 2025, which could convert half of its current RD production to SAF and would go a long way to help clear the glut of RD being experienced in some west coast markets.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk Update 1.25.24

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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.

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

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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