Oil And Gasoline Prices Are Rallying Thursday After A Big Wednesday Sell-Off

Oil and gasoline prices are rallying Thursday after a big Wednesday sell-off as a better-than-many-expected inflation report has taken the focus away from concerns about slumping fuel demand. 

US equity futures are seeing huge gains this morning following a CPI report that came in far below estimated levels.  RBOB futures have been following stocks relatively closely over the past couple of weeks and have rallied to 6 cent gains after that report while diesel prices are resisting and still trading lower for the day so far.   

NY Harbor ULSD basis set a new record at $1.25 over December ULSD futures Wednesday, which means someone was willing to pay $1.25 per gallon to have diesel today rather than taking delivery in New York Harbor by the end of December. That phenomenon is creating all sorts of ripple effects up and down the East Coast, as those with extra inventory in tank try to draw it down to avoid the 2-3 cent/day slide in values, while those with trucks search far and wide for supply a state or two south that costs substantially less.

LA Spot gasoline basis surged north of $1/gallon above RBOB futures Wednesday following the Tuesday night fire at an LA refinery. Later in the day reports surfaced that the fire did not impact production units, which may mean we’ll soon see another dramatic reversal in those prices. 

The EIA’s monthly Short Term Energy Outlook (STEO) forecast that the US would officially move into a recession late in 2022, and emerge from it in the back half of 2023. Despite the drop in demand that would come with that prediction, the report increased its forecasted diesel prices for the next year since their models suggest that won’t be enough to offset the historically low supplies in many parts of the world. New refinery capacity in the Middle East and China is coming online just in time to help with the diesel crunch, although shipping logistics will remain a bottleneck as Russian distillates will no longer flow via pipeline to Europe next year. This article from John Kemp of Reuters explains why new exports from China can help, but can’t solve the problem.

The STEO report also forecast that the tight diesel supplies will help put downward pressure on gasoline prices as refiners can still operate profitably thanks to distillate cracks well north of $1/gallon margin, even if it means taking a hit to find a home for the gasoline that nobody wants over the winter time. 

The DOE’s weekly report helped support that theory as US refinery runs continue at above-average levels in all 5 PADDs, despite the large drops in refining capacity over the past several years.  Many plants had to complete substantial maintenance this fall after many projects were delayed in the prior years. A tick higher in US diesel imports also showed that the global market can still react to high prices, despite the challenges of ocean freight logistics both domestically and abroad. Gasoline stocks dropped to a fresh 8 year low last week as strong exports and a tick higher in domestic consumption estimates helped offset the increase in refining output.

Ethanol prices have seen a healthy pullback over the past 2 days as the “cooling off” period to avoid a rail strike was extended to early December, and US ethanol production increased for a 4th straight week, which is helping keeping US inventories well above their seasonal average levels.

Hurricane Nicole made landfall as a Category 1 storm overnight roughly 60 miles south of the port of Cape Canaveral. We should find out later today whether or not there’s any damage to the terminals that receive fuel shipments in the area, but given the proximity and strength of the storm, it seems like this should be a short lived issue. Power issues appear to be the most immediate threat as there have been multiple reports of power issues causing fuel terminals in Orlando and Tampa to be offline. 

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