Refinery Restart, Sell-Off in Equities Send ULSD Prices Lower

ULSD could not sustain a record-setting 12th day of increases Wednesday as a sell-off in equities and a refinery restart both contributed to a big reversal in refined products and the crude oil market shrugged off the biggest inventory decline on record.

Gasoline prices have dropped nearly 20 cents in the past 24 hours after the P66 Bayway restart drove PADD 1 refinery runs sharply higher for a 2nd straight week, alleviating concerns of a supply squeeze along the East Coast ahead of the fall RVP transition. The West Coast meanwhile is pointing higher as we approach the final summer-grade pipeline cycles of the year. So far, the 30-40 cent premiums are a far cry from the $2/gallon spreads we saw last August, but there could be more upside ahead as refiners will be reluctant to make more of a product that no one will want in a few weeks. 

While ULSD futures saw a big outside-down reversal day Wednesday, setting a new high only to finish with a lower low and settlement than the prior day, prices are not collapsing like they are with gasoline, giving the bulls a chance to contain the selling into nothing more than an overdue correction after a record-tying 11 consecutive increases. The $3 mark may well prove a pivotal level psychologically as we end the week to determine if the rally resumes or if we just saw the high trade of the season earlier in the week.

The big reversal in refined products seems to coincide more with the selloff in equity markets the past two days following a downgrade of the US debt rating more than anything to do with the weekly inventory reports. The correlation between daily moves in energy futures and equity markets continues to hold at the strongest levels we’ve seen in 2.5 years now that global supply fears have eased, and the big question of the day is how the economy will drive demand.

Speaking of which, gasoline demand did see a small decline last week, but didn’t move the needle on inventories which only managed a small build and remain below year-ago levels.  Diesel demand ticked higher for a 3rd straight week which is holding inventories close to the bottom end of the 5-year range in most markets.

The DOE reported a 17-million-barrel drop in oil inventories last week, the biggest decline in the 40+ years of the weekly status report. Nobody seemed to care much, in large part because nearly 14 million barrels of that decline was due to a change in the “adjustment factor” that’s code for “we don’t know what the real numbers are”. 

The Q2 refiner earnings reports are shedding more light on the rapid expansion of Renewable diesel production. CVR Energy discussed plans to add a renewable diesel unit at its Coffeyville facility after a successful startup at its facility in Wynnewood OK, continuing the trend of refiners co-processing rather than converting that may be giving others shut-down remorse. Speaking of which, HFS announced another negative quarter for earnings in its renewables segment even though volumes have doubled in the past year. P66 meanwhile announced that it still on track with its Rodeo CA conversion, with commercial operations set to begin in Q1 2024.

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