It’s Reversal Thursday As Oil And Refined Product Prices Trade Lower After A Big Rally In The Front Half Of The Week

It’s reversal Thursday as oil and refined product prices trade lower after a big rally in the front half of the week. So far, the pullback looks like nothing more than a little profit taking after a 3-day rally that added 50 cents to diesel futures and 30 cents to gasoline. As long as ULSD can hold above the $3.50 range, the door is open for another run at $4 in the near term, with a move to $4.50 still looking possible this winter. Gasoline isn’t as bullish from a technical or seasonal perspective, although yesterday’s DOE report gave fundamentalists reason to think those prices should continue moving higher as well. 

OPEC & Friends announced an output cut of 2 million barrels from their previous output target Wednesday, which sent shockwaves through the markets even though the newly reduced target is still 1 million barrels/day more than the cartel’s actual production. See the comparison of target vs actuals below.

In reality, only Saudi Arabia, UAE and Kuwait have agreed to cut production levels by 100mb/day or more from their actual levels, with the total cut from those 3 countries roughly 700mb/day, or roughly 1/3 of the headline announcement. That is still a significant output cut to be sure, and a clear sign that Saudi Arabia is sticking by Russia, but not nearly as big a deal as the networks would have you believe. 

It’s also worth noting that Libya, Iran, Nigeria and Venezuela continue to be exempt from the output cut agreements given their various states of societal disarray, making their erratic production levels a continued wild card. A WSJ article this morning suggests that the US is attempting to relax sanctions on Venezuela to bring more of its oil back to the market.

Gasoline inventory in the US reached an 8 year low last week, even though refineries are produced more than 10 million barrels/day, which is well above domestic consumption. A 2nd straight week of demand growth, and weak import levels – particularly for the West Coast – both contributed to the decline. Somewhat ironically, the news of extremely tight gasoline markets coincided with California gasoline markets tumbling by more than $1.30/gallon, as the basis bubble popped after the state relaxed its RVP requirements this week.

While gasoline values were crumbling in California, diesel values continued their strong rally as inventories in PADD 5 dropped to a 2 year low. 

RIN prices were continuing to rally Wednesday morning, until a report that the EPA would be recommending “e-RINs” be included in the RFS next year, which sent values lower in the afternoon. There are still many questions as to how the electric-based RINs would qualify for RIN generation, whether they’d create yet another category of RIN, and if refiners would still be on the hook for the entire obligated amounts, or if this move would bring power plants into the pool of obligated parties.

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