Momentum Is Waning In Refined Product Markets

Market TalkTuesday, Oct 19 2021
Pivotal Week For Price Action

Momentum is waning in refined product markets this week after prices stalled out early Monday and are slipping modestly lower again this morning. While the pullback of 5-6 cents from the 7 year highs set early Monday morning are noteworthy, we’ll need to see prices drop another 7-8 cents in the coming days before they threaten the bullish trend lines that have been in place since the August pullback. In other words, so far this week’s selling looks more like a correction to an overbought market, rather than a reversal of that upward trend.

While refined products are struggling, both WTI and Brent are moving higher this morning, putting downward pressure on crack spreads. Unfortunately for refiners, there’s a double whammy on their margins this week as RIN values reached their highest settlement in nearly 6 weeks yesterday, even though RIN values and crack spreads often move in the same direction.    

Keep an eye on calendar spreads this week, as severe backwardation in futures that’s steadily grown over the past month’s rally seems to be having strong influence on regional cash markets and inventory levels. What we’re seeing today in the RBOB market, with November prices down a penny more than February values, could be a sign of what’s to come once the supply squeeze has passed. For both ULSD and RBOB, we could see 5-10 cents price drops in front month values just to get the curve back to a more normal level. 

This phenomenon is perhaps most glaring in the Group 3 diesel market, where basis values for ULSD dropped to 8 cents below futures, a level we’re used to seeing during the demand doldrums in winter, not during the peak of harvest season where we are today. The weakness in Midwestern diesel values seems to be trickling down to the gulf coast, as shippers will want to avoid moving barrels north to sell at a net loss, which should eventually correct the pricing mismatch.

An EIA report this morning highlights how improvements in drilling and well completion over the past decade allow for more oil to be produced in the Permian basin with lower costs.  Meanwhile, the EIA’s monthly drilling rig report highlights that output per rig is forecast to drop slightly in the coming month as producers sacrifice efficiency during the restart race, but total output is expected to continue climbing along with the drilling rig count. 

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Market Talk Update 10.19.21

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Pivotal Week For Price Action
Market TalkWednesday, Jul 17 2024

Energy Markets Are Trying To Find A Price Floor After Gasoline And Crude Oil Staged A Healthy Bounce To Minimize The Heavy Losses

Energy markets are trying to find a price floor after gasoline and crude oil staged a healthy bounce to minimize the heavy losses we saw early in Tuesday’s session. WTI is leading the move higher early Wednesday, up nearly $.90/barrel in the early going, while RBOB prices are up just under a penny.

Diesel continues to look like the weak link in the energy chain both technically and fundamentally. Tuesday the API reported a 4.9 million barrel build in diesel stocks, while gasoline inventories were only up 365,000 barrels, and crude oil stocks declined by more than 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning and it’s likely we’ll see a reduction in oil output and PADD 3 refining runs thanks to shut ins ahead of Hurricane Beryl, but otherwise the storm appears to be a relative non-issue with only 1 notable refining hiccup, that wasn’t even as bad as a midwestern Thunderstorm.

Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkTuesday, Jul 16 2024

The Sell-Off In Energy Markets Continues, With Refined Products Reaching Their Lowest Levels In A Month Early In Tuesday’s Session

The sell-off in energy markets continues, with refined products reaching their lowest levels in a month early in Tuesday’s session. Reports of slowing growth in China, the world’s largest oil purchaser, is getting much of the credit for the slide in prices so far this week, although that doesn’t do much to explain why refined products are outpacing the drop in crude.

ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

Physical markets are not offering any strength to the futures market with all 6 of the major cash markets for diesel across the US trading at a discount to ULSD futures, while only 1 gasoline market is trading at a premium to RBOB futures. That combination of weakness in futures and cash markets is going to be troubling for refiners who are seeing margins reduce during what is traditionally a strong time of year.

The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

Click here to download a PDF of today's TACenergy Market Talk.