Energy Futures Up Modestly After Diesel Prices Touch Pre-War Lows

Diesel futures touched their lowest prices since before Russia’s invasion of Ukraine overnight before seeing a modest bounce of a couple cents this morning. The low trade at $2.7609 less than two weeks after the March HO contract hit a high of $3.58 fulfilled the technical target made when the chart support failed to hold last week and sets up a potential drop to the $2.50 range in the next few weeks if buyers don’t step in at these levels.
While the drop in diesel futures has been eye-opening, it still hasn’t been confirmed in US Cash Markets, or by RBOB and WTI contracts that are all still trading well off their December lows. That lack of confirmation from the other contracts suggests the past two weeks have been more about diesel prices normalizing after an incredibly strong year more than a complete market collapse due to fear of a global economic slowdown.
We didn’t get to see the reaction by large speculators to the melt-down that came right after they’d increased their bets on higher prices, as the CFTC was forced to delay publication of its weekly Commitments of Traders report due to a Russian-linked ransomware attack at ION Derivatives, a UK-based service provider that processes transactions and submits trading data to the agency. It appears that the attack may be disrupting trading in some ETF derivatives but is not directly impacted trading on any NYMEX or ICE Commodity futures or options.
The official embargo on Russian diesel exports took effect Sunday, without much fanfare as Western buyers had months to stock up ahead of time and flows of product to the East seem to be ramping up well. A Bloomberg note over the weekend highlighted the increasing role India is playing in turning Russian crude and unfinished fuel oil into gasoline and diesel destined for the US and Europe.
Motiva’s Port Arthur Refinery reported an incident over the weekend that disrupted operations at one of its coker units. The event caused flaring for around 5 hours, but at this point it does not appear that run rates were reduced because of it.
The IEA’s director over the weekend said the potential rebound in demand from China may force producers to reconsider their output policies this year, implying that OPEC would need to end its voluntary restrictions to meet the increased consumption.
US oil producers aren’t acting like they got that memo, with Baker Hughes reporting a decline of 10 oil rigs and 2 natural gas rigs in the US last week, bringing the total count to a 4-month low. The declines were spread out fairly evenly across the drilling geography suggesting this wasn’t an isolated even caused by the winter storms.
The huge earthquake that killed more than 1,000 people in Turkey also temporarily halted operations at a major crude oil pipeline system that delivers oil from origin points in the Caspian Sea and Iraq to the Mediterranean. It appears that major damage was avoided to the pipeline, so shipping should be able to resume shortly. Syria was forced to shut its largest refinery after the quake, but given that facility is only 130mb/day, and it’s in Syria, it’s not going to have much impact on markets elsewhere.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.

Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.
