Rallying Distillate Futures Push Energy Complex Higher

The rally marches on to start a new week with refined products up 3 cents so far on the day, reaching their highest levels since mid-November. Both fundamental and technical indicators suggest this rally may have more room to run, as more refinery issues crop up in the US and Europe, and prices have broken through their near term resistance on the charts.
Diesel prices are up 58 cents from their January 4th lows, following the largest selloff to start a year in 3 decades with nearly 3 weeks of strong gains. This also puts distillate prices nearly 75 cents higher than they were at their December lows, and the charts suggest there’s plenty of room to move higher still with a run at $3.70 or even $4 looking likely in the next several weeks.
The gasoline price rally isn’t quite as impressive, with RBOB futures “only” rising 43 cents off of their January lows, and 64 cents since bottoming out in December. Considering that we’re just moving through the worst few weeks of the whole year for gasoline demand however, that rally is still an impressive feat, leaving the door open for a run at $2.80 or $3 over the next month. While the charts are now favoring higher prices, numerous technical indicators are flashing “overbought” status, meaning a sharp pullback is to be expected along the way and could happen this week. As long as the upward trend-lines aren’t broken, that pullback should be a decent buying opportunity.
The squeeze is on. Money managers made substantial increases in the net length held in energy contracts last week, driven in large part by a big reduction in short positions for WTI and Brent as the price rally marched on. In total, more than 45,000 short contracts were covered as the big speculators that had been betting on lower prices threw in the towel. For Brent, speculative length has reached a 4 month high, and will hit a year high next week if the recent upward trend can hold.
We have seen large increases in open interest so far in 2023 as lower volatility seems to be encouraging some traders to dip their toes back in the water, but the overall positions remain low compared to the past 5-7 years.
Baker Hughes reported a large decline in oil rigs last week, with the total US count dropping by 10, bringing it to a 2 month low at 613. Natural gas rigs meanwhile saw a large increase of 6 on the week, bringing that weekly total to 156. Given the long lead times needed to get enough people, equipment, and sometimes funding in place for a drilling rig, it seems the current drop in oil rigs may be a reflection of the market pessimism 2 months ago when WTI traded down to the $70 mark, or it could be a sign of shifting to favor natural gas production as the world was expecting a harsh winter heating season that simply has not yet materialized.
A fire broke out at the PBF refinery outside of New Orleans Saturday, but was quickly extinguished without any injuries. So far there are no reports on whether or not operations have been curtailed following that fire.
Today’s interesting read from the WSJ: A debate over whether or not blending more biofuels will benefit the environment.
Protesting unions in France are threatening to cut off electricity supplies and shut down refineries, as the country continues to struggle with either making people work 2 more years before getting their state pension or going bankrupt. Those protests continue to offer a reason for buyers to bid up refined product futures as the Atlantic basin is stretched thin for refinery output already.
Click here to download a PDF of today's TACenergy Market Talk.
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Wholesale Gasoline Prices Across Most Of The US Reached Their Lowest Levels In 2-Years Thursday
Wholesale gasoline prices across most of the US reached their lowest levels in 2-years Thursday, after the morning recovery rally fizzled in the afternoon. RBOB gasoline futures dipped below the $2 mark briefly, before settling just above it, while cash prices in several major markets dropped below $1.80 for the first time since December 2021, while crude oil and diesel prices reached fresh 6-month lows.
The bulls are giving it another go this morning, pushing futures up 5-cents for gasoline and 6- cents for diesel, trying to snap the streak of 6-straight daily losses for ULSD, although we’ll need to see products double their early gains to erase the weekly decline.
Energy prices didn’t react much initially to the November Payroll report that estimated 199,000 jobs were added during the month, while the official unemployment rate dipped to 3.7% from 3.9% and the U-6 rate dropped to 7% from 7.2%. Equity futures moved modestly lower immediately following that report as labor market resilience throws cold water on recent hopes for interest rate cuts, but as has often been the case for several months now, energy prices are managing to shrug off the move in stocks.
Big negative basis values continue to be the theme across the Gulf Coast and Mid-Continent, with USGC, Group 3 and Chicago all trading at 20+ cent discounts to futures for both gasoline and diesel. Those negative values are weighing on refining margins with USGC crack spreads approaching their lowest levels in 2 years, which will almost certainly curtail some refinery run rates through the winter months. East Coast refiners meanwhile are finding themselves in a strong position as shipping bottlenecks keep PADD 1 inventories low and their crack spreads remain in the mid $20/barrel range despite the recent pull back in futures.
The long-awaited Dangote refinery is reportedly receiving its first cargo of crude oil today. That new 650mb/day refinery would be the world’s largest single train refinery, but is already years behind schedule, and many still doubt its ability to run anywhere near capacity. We’ve already seen the impact Kuwait’s 615mb/day Al Zour refinery can have on markets across the Atlantic basin, so whether or not the Nigerian facility can ramp up run rates could have a major influence on product prices next year.
Click here to download a PDF of today's TACenergy Market Talk.

West Coast Gasoline Inventories Dropped Sharply Last Week And Are Now Holding Below Their 5-year Seasonal Range
Energy futures are bouncing this morning as buyers are finally stepping in after RBOB futures touched a 2-year low Wednesday, while WTI and ULSD both hit their lowest levels in 5 months. There are headwinds both fundamentally and technically, but so far, the market isn’t acting like a collapse is imminent and as the table below shows this is right about the time when gasoline prices bottomed out the past two years.
Saudi Arabia and Russia released a joint statement this morning, following Vladimir Putin’s trip to the Kingdom, urging OPEC & friends to join their output cut agreement, which takes the risk of a price war that could send prices plunging (as we’ve seen twice in the past decade) off the table for now and seems to be contributing to WTI climbing back above the $70 mark and Brent getting back above $75.
The DOE reported a healthy bounce back in fuel demand estimates after the annual Thanksgiving holiday hangover, but that wasn’t enough to prevent refined product inventories from continuing to build as refiners continue to return from maintenance and increase run rates. The builds in gasoline inventories particularly suggest it could be a tough winter for some refiners who are already having some challenges clearing their extra barrels.
The exception on gasoline comes in PADD 5. West Coast gasoline inventories dropped sharply last week and are now holding below their 5-year seasonal range, which is dramatically lower than year-ago levels which set the top end of that range. Those tight stocks help explain why West Coast values are the most expensive in the country by a wide margin and leave little cushion to deal with unplanned maintenance which helps explain the jump in CARBOB basis values this week.
On the diesel side of the barrel, the recent themes of tight supplies on the East Coast, ample supply in the Midwest and Gulf Coast, and a Wild Card on the west coast since we don’t see Renewable Diesel inventories in the weekly figures continues. Take a look at the PADD 2 gasoline and diesel charts below and it’s easy to understand why we’re seeing cash prices in both Group 3 and Chicago approaching multi-year lows with 20-30 cent discounts to futures becoming the rule rather than the exception.
The market seemed to shrug off the drop in total US crude oil stocks, as Cushing OK stocks increased for a 7th straight week, and the decline was largely driven by the largest negative adjustment value on record, which went from a positive 1.2 million barrels/day last week to negative 1.4 million barrels/day this week. The EIA has done a lot of work trying to fix the bugs in its report system and to better define what exactly it’s reporting, but clearly there’s still more work to be done.
