November ULSD Has Taken Back Its Place As The Leader Of The Energy Rally
Someone continues to think it’s a good idea to try and sell refined products in the overnight sessions, even though we’ve seen strong rallies wipe out those losses every day this week. November ULSD has taken back its place as the leader of the energy rally, setting a new 4 month high for futures, and pushing the spread vs the December contract north of 50 cents/gallon this morning. RBOB is seeing a similar push higher, threatening to break the $3 mark and pushing it’s prompt/2nd month spread north of 33 cents/gallon this morning. Those big moves in time spreads continue to wreak havoc on basis markets across the country as cash market traders deal with huge basis swings that are often doing nothing more than sliding down the steep backwardation curve.
Two examples of this phenomenon from Wednesday: Group 3 ULSD dropped sharply and traded 40 cents below November ULSD, but still commanded a premium to the rallying USGC contract that’s trading at a 5 cent premium to December. In LA we saw CARBOB basis values climb more than 40 cents on the day, but cash values still declined by a nickel for the day as that market rolled to a December reference month.
The best cure for high prices is high prices: Note the spike in West Coast (PADD 5) imports in the charts below from the DOE’s weekly report. That shows how the cargo market reacted to the big price premiums we saw in late September, and those barrels hitting the market then contributed to those prices crashing. Now that we’re seeing NY Harbor prices commanding the huge premiums in October, we should see imports into PADD 1 increase in the next few weeks although the Atlantic basin doesn’t seem to have the spare fuel the Pacific does owing to the chaos in Europe and refinery closures after a decade of Europe and the US East Coast having too much refining capacity.
PADD 1 refinery runs have ticked up to the 2nd highest weekly level since the PES refinery exploded and closed in 2019 as plants return from their fall maintenance and the facilities that had been limping along just trying to survive for the past few years are now finding themselves in the right place at the right time. Right on cue, PBF’s Q3 earnings showed the company made more than $1 billion during the quarter, nearly 18 times more than they made this time a year ago.
On the other hand, not everything is rosy in refinery land as the largest remaining PADD 1 refiner has reportedly gone through a restructuring and laid off numerous employees across the country. We just witnessed strikes at refineries in France that shut down 4 facilities and contributed to the tight supplies in the US East Coast this month, as workers protested the companies making record earnings while the employees weren’t sharing in that success, and it wouldn’t be surprising if we saw similar reactions at some US facilities following this type of action.
Speaking of Atlantic basin refinery capacity, one detail of the upcoming European sanctions on Russian energy exports is an Italian refinery that could be forced to close due to its links to Russian-owned Lukoil, which would cut the country’s production capacity by 20%. Germany recently took control of 3 refineries to avoid a similar problem, although it’s still unclear how those facilities will be supplied once the bans start in December.
That uncertainty of oil supply, along with the ongoing release of 1 million barrels/day from the SPR helped push US crude oil exports reached an all-time high last week with more than 5.1 million barrels (214 million gallons) of crude being sent abroad every day. If that statement makes you want to jump on the export ban bandwagon, take a look at the chart of exports over the past 15 years, and compare oil prices today to the 2008–2013-time frame when crude oil exports were mostly illegal, and prices were still regularly north of $100/barrel.
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Gasoline Futures Are Leading The Way Lower This Morning
It was a volatile night for markets around the world as Israel reportedly launched a direct strike against Iran. Many global markets, from equities to currencies to commodities saw big swings as traders initially braced for the worst, then reversed course rapidly once Iran indicated that it was not planning to retaliate. Refined products spiked following the initial reports, with ULSD futures up 11 cents and RBOB up 7 at their highest, only to reverse to losses this morning. Equities saw similar moves in reverse overnight as a flight to safety trade soon gave way to a sigh of relief recovery.
Gasoline futures are leading the way lower this morning, adding to the argument that we may have seen the spring peak in prices a week ago, unless some actual disruption pops up in the coming weeks. The longer term up-trend is still intact and sets a near-term target to the downside roughly 9 cents below current values. ULSD meanwhile is just a nickel away from setting new lows for the year, which would open up a technical trap door for prices to slide another 30 cents as we move towards summer.
A Reuters report this morning suggests that the EPA is ready to announce another temporary waiver of smog-prevention rules that will allow E15 sales this summer as political winds continue to prove stronger than any legitimate environmental agenda. RIN prices had stabilized around 45 cents/RIN for D4 and D6 credits this week and are already trading a penny lower following this report.
Delek’s Big Spring refinery reported maintenance on an FCC unit that would require 3 days of work. That facility, along with several others across TX, have had numerous issues ever since the deep freeze events in 2021 and 2024 did widespread damage. Meanwhile, overnight storms across the Midwest caused at least one terminal to be knocked offline in the St. Louis area, but so far no refinery upsets have been reported.
Meanwhile, in Russia: Refiners are apparently installing anti-drone nets to protect their facilities since apparently their sling shots stopped working.
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The Sell-Off Continues In Energy Markets, RBOB Gasoline Futures Are Now Down Nearly 13 Cents In The Past Two Days
The sell-off continues in energy markets. RBOB gasoline futures are now down nearly 13 cents in the past two days, and have fallen 16 cents from a week ago, leading to questions about whether or not we’ve seen the seasonal peak in gasoline prices. ULSD futures are also coming under heavy selling pressure, dropping 15 cents so far this week and are trading at their lowest level since January 3rd.
The drop on the weekly chart certainly takes away the upside momentum for gasoline that still favored a run at the $3 mark just a few days ago, but the longer term up-trend that helped propel a 90-cent increase since mid-December is still intact as long as prices stay above the $2.60 mark for the next week. If diesel prices break below $2.50 there’s a strong possibility that we see another 30 cent price drop in the next couple of weeks.
An unwind of long positions after Iran’s attack on Israel was swatted out of the sky without further escalation (so far anyway) and reports that Russia is resuming refinery runs, both seeming to be contributing factors to the sharp pullback in prices.
Along with the uncertainty about where the next attacks may or may not occur, and if they will have any meaningful impact on supply, come no shortage of rumors about potential SPR releases or how OPEC might respond to the crisis. The only thing that’s certain at this point, is that there’s much more spare capacity for both oil production and refining now than there was 2 years ago, which seems to be helping keep a lid on prices despite so much tension.
In addition, for those that remember the chaos in oil markets 50 years ago sparked by similar events in and around Israel, read this note from the NY Times on why things are different this time around.
The DOE’s weekly status report was largely ignored in the midst of the big sell-off Wednesday, with few noteworthy items in the report.
Diesel demand did see a strong recovery from last week’s throwaway figure that proves the vulnerability of the weekly estimates, particularly the week after a holiday, but that did nothing to slow the sell-off in ULSD futures.
Perhaps the biggest next of the week was that the agency made its seasonal changes to nameplate refining capacity as facilities emerged from their spring maintenance.
PADD 2 saw an increase of 36mb/day, and PADD 3 increased by 72mb/day, both of which set new records for regional capacity. PADD 5 meanwhile continued its slow-motion decline, losing another 30mb/day of capacity as California’s war of attrition against the industry continues. It’s worth noting that given the glacial pace of EIA reporting on the topic, we’re unlikely to see the impact of Rodeo’s conversion in the official numbers until next year.
Speaking of which, if you believe the PADD 5 diesel chart below that suggests the region is running out of the fuel, when in fact there’s an excess in most local markets, you haven’t been paying attention. Gasoline inventories on the West Coast however do appear consistent with reality as less refining output and a lack of resupply options both continue to create headaches for suppliers.