Momentum Slowing In Energy Complex After 5 Day Rally

It’s a mixed bag for energy markets to start Friday’s session with RBOB and crude oil contracts moving higher, while ULSD futures are extending Thursday’s losses. Yesterday’s selling certainly slowed the upward momentum in the energy complex after a strong 5 day rally, but prices are still on pace for a 2nd straight weekly gain after seeing ULSD and WTI reach 4 year lows on Monday May 5, and short term charts still favor more upside as we race towards the summer.

Backwardation is back in style with ULSD premiums north of 5.5 cents/gallon from June to July futures, and even steeper premiums in some cash markets. Low inventories and a robust export market are getting credit for the steady increase in front month backwardation. The strength in spreads is very much limited to the next 6 months, as further forward values have extended into a deep contango over the past month, which can be interpreted as the market expecting oversupply in the distillate market to show up next year.

RBOB futures have also seen a stronger curve with the premium between the prompt month (June) and July contracts north of 4 cents this morning as traders are acting like gasoline stocks are tightening ahead of the driving season, even though increasing refinery runs suggest more supply is on the way.

California’s gasoline prices are dropping in a hurry this week after official data shows that the impact on refineries of numerous upsets earlier in the month wasn’t as bad as many believed, and as a wave of imports hits the coast, taking advantage of the huge spreads present earlier in the month. The Pacific basin is certainly long on refining capacity with multiple new facilities built in recent years, and several more in the works, as evidenced by weak crack spreads in the region (See refining margin chart from OPEC below) so there’s certainly the ability to bring in foreign supply when these disruptions occur. Of course, that leaves plenty of questions about the strategy of Californians being more reliant on India, Korea and China for fuel than they are domestic producers, which seems to be causing state officials some reason to re-think their strategy to kill the industry.

The RIN rollercoaster was on full display Thursday after prices had reached their highest levels since September 2023 on Wednesday. Congressional testimony from the EPA commissioner, a phantom draft of next year’s RVO targets and the April RIN generation data all came about within 24 hours which led to multiple big swings. Based on the EPA’s RIN generation data that showed a decline of 4% in D6 production compared to an increase of just 3% on D4’s last month, the 10% drop in RIN values on the day probably had less to do with the fundamental data (which was leaked a day before its official release) and more to do with the commissioner saying they wanted to get caught up quickly on the Small Refinery Exemptions that have been pending for years. See tables and charts below.