Reversal Thursday Pares Week's Rally

That escalated quickly. The rally in ULSD futures picked up steam Wednesday, adding 12 cents on the day, and setting a new 6 month high nearly 30 cents above Tuesday’s low overnight. RBOB and WTI both joined in on the big move higher as well, with crude oil reaching a new high for the year, while gasoline prices continue to flirt with the $3 mark.   Prices are taking a breather in the early going this morning, in what looks like a classic “Reversal Thursday” pattern that probably won’t mean much when the week ends. 

Refined product prices did bounce a couple cents off their morning lows following the July CPI report which showed another month of relatively tame inflation. Perhaps most notable in this report is that energy prices were only up a 10th of a percent, which means the rally in gasoline and diesel prices hasn’t hit the official numbers yet. As the chart from the BLS below shows, energy prices have been the key governor on inflation over the past year, but with the recent rally, that’s about to change.     

The rally in ULSD futures has created a flag pattern on the daily chart that suggests a run all the way to $3.50 could be coming soon, with the weekly charts suggesting the bulls still have things well under control after Tuesday’s big bounce. 

After 4 straight weeks of below-average numbers, the DOE’s estimate for gasoline demand jumped last week to outpace both the 5-year average and year-ago figures. With just about 5 weeks left in the summer RVP season, and the big price bounce this week, this leaves the door open for a last push towards the $3 mark for RBOB futures, despite today’s pullback.   

We’re also just under 5 weeks away from the peak of hurricane season. While the factors contributing to the record setting heat wave are also keeping a lid on tropical activity at the moment, forecasters still are calling for an active season, which will keep suppliers on the edge of their seat given the lack of supply cushion and excess refining capacity.

So far, refiners are keeping pace with last year’s output levels, despite numerous heat-related hiccups, and the recent earnings reports and the rally in crack spreads the past few weeks suggest they should continue to run hard through the fall after a busy spring maintenance period, provided that storms or other events don’t knock them offline.

If you look at only the PADD 5 diesel inventory chart below, it would come as little surprise that basis values are holding at their highest level of the year. Those stats are leaving out the big story however which is the rapid influx of new Renewable Diesel output that’s being shipped to West Coast markets to save the environment take advantage of the LCFS and Cap & Trade programs. Eventually the DOE will include those figures in its weekly report, as it did with Ethanol more than a decade ago, but in the meantime, both the inventory and demand estimates will be understated, which gives fundamental fans something to pin yesterday’s big rally on despite the sluggish diesel consumption estimates.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.