OPEC Production Cut Slashes Refining Margins

Market TalkTuesday, Apr 4 2023
Pivotal Week For Price Action

OPEC’s million barrel production cut announcement continues to ripple through energy markets, although ongoing concerns about a weakening economy seem to be keeping buyers in check. Monday’s big jump in oil prices was bad news for refiners, as refined products weren’t able to keep pace with oil and crack spreads dropped by about $2/barrel as a result.  

Cracks are now at the low end of their range for the past year but remain well above levels we saw for 2 years prior and still way above where we’d expect to start seeing run cuts for economic reasons.

The problem technically with the big jump in WTI is that it left a significant gap in the charts between $76 and $79 that some traders (or more likely their algorithms) will be programmed to fill, but whether that comes before another big rally attempt, or after that rally runs its course is impossible to know. If WTI can break and hold above the 2023 highs around $82, there’s a good chance we’ll see a run at $90, although the 200-day moving average should offer some resistance around $85.

RBOB is looking similar to WTI, with a small gap left in its chart by the April contract expiration and the big rally to start the new month. We may see RBOB fill that gap this morning however (it’s just 2 cents away at the moment) which would then reopen the door for the seasonal rally into the “driving season” headlines that could easily push prices north of $3 soon.

ULSD continues to look the weakest on the charts after spending most of last year as the strongest. At this point, even though ULSD prices are 18 cents above their lows for the year set 3 weeks ago, they’ll need to rally another 15-20 cents just to break out of their slump and avoid another big move lower. While this winter was unusually unkind to diesel prices, there are some signals that supplies could soon tighten up, and prices could rally again, particularly if WTI and RBOB lead the way.

French refinery strikes continue to be largely ignored by refined product markets thanks to soft demand and a jump in imports from the Middle East (thanks to Russian barrels finding new homes).   An Argus note published Monday suggests that this could soon come to an end however as inventory stockpiled ahead of the Russian diesel embargo are rapidly depleting and will soon bring more buyers back to the Atlantic basin. 

Markets across the US Southwest remain very tight, with diesel prices pushing close to $1/gallon over spot markets in a few spots, while Phoenix’s AZRBOB is going for nearly $1.30 above LA spots. 

The Dallas FED’s banking conditions survey offered a snapshot into how the fallout of banking failures is impacting a market that already had plenty of negative data points, as lending slowed for a 5th straight month, and the outlook for future lending continued to deteriorate.

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Market Talk Update 04.04.2023

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkWednesday, Nov 29 2023

The API Reported Gasoline Inventories Dropped By 898,000 Barrels Last Week

Gasoline and oil prices are attempting to rally for a 2nd straight day, a day ahead of the delayed OPEC meeting, while diesel prices are slipping back into the red following Tuesday’s strong showing. 

The API reported gasoline inventories dropped by 898,000 barrels last week, crude inventories declined by 817,000 barrels while distillates saw an increase of 2.8 million barrels. Those inventory stats help explain the early increases for RBOB and WTI while ULSD is trading lower. The DOE’s weekly report is due out at its normal time this morning. 

A severe storm on the Black Sea is disrupting roughly 2% of the world’s daily oil output and is getting some credit for the bounce in futures, although early reports suggest that this will be a short-lived event. 

Chevron reported that its Richmond CA refinery was back online after a power outage Monday night. San Francisco spot diesel basis values rallied more than a dime Tuesday after a big drop on Monday following the news of that refinery being knocked offline.

Just a few days after Scotland’s only refinery announced it would close in 2025, Exxon touted its newest refinery expansion project in the UK Tuesday, with a video detailing how it was ramping up diesel production to reduce imports and possibly allow for SAF production down the road at its Fawley facility. 

Ethanol prices continue to slump this week, reaching a 2-year low despite the bounce in gasoline prices as corn values dropped to a 3-year low, and the White House appears to be delaying efforts to shift to E15 in an election year. 

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Pivotal Week For Price Action
Market TalkTuesday, Nov 28 2023

Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week

The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday. 

Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.

Reversal coming?  Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.

Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness. 

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