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

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.

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