The Sharp Pullback In Diesel Prices Is Bad News For Refiners

Energy futures are trading near 2-month lows Tuesday, as yet another rally attempt ran out of steam in Monday’s session. ULSD prices are leading the way lower once again, down nearly 9 cents overnight and coming within 3 cents of the October low that looks to be a pivotal level this week. 

The sharp pullback in diesel prices is bad news for refiners that are seeing their crack spreads drop to the lowest levels since before the war in Ukraine broke out 20 months ago.  Gasoline margins have dropped to their lowest levels since the COVID lockdowns, so plants are increasingly dependent on diesel margins to break even. 

One bright spot is that the sharp drop in RIN values over the past few months has cut $3-4/barrel off the operating costs of a refinery, offsetting some of the drop in outright margins.

Adding to the bearish tone for distillates, the EIA yesterday reported that natural gas inventories are full in the US and Europe heading into the winter demand season, and new LNG export capacity should help alleviate concerns of shortages, reducing the need for switching to diesel as a supplement. The cheaper natural gas prices in the US and Europe are also a help for refiners as it lowers their operating costs for the large amounts of electricity and steam needed to run the facilities. Those cost savings are a small consolation compared to the drop in gross margins however, particularly since we haven’t even started the seasonal demand slowdown.

Reminder that the DOE is not publishing its weekly statistics this week as the agency completes a systems upgrade. The API’s weekly stats are expected to stay on schedule.

The DOE issued an RFP to buy 3 million barrels of oil for the SPR in January, or roughly 1% of the amount that’s been removed from the reserve over the past 3 years. The Dallas FED published an interesting research study on the history of the SPR, along with the idea that the dramatic increase in domestic oil production reduces the need for the reserve to be filled to prior levels.

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