RBOB Gasoline Futures Are Once Again Leading The Price Action, Dropping A Nickel In The Early Going After Rallying 7 Cents Monday

Market TalkTuesday, Jan 23 2024
Pivotal Week For Price Action

Energy futures are sliding back into the red Tuesday after a strong rally Monday as traders appear to have remembered that it’s still January. RBOB gasoline futures are once again leading the price action, dropping a nickel in the early going after rallying 7 cents Monday, while ULSD futures are currently close to erasing Monday’s 3 cent gains. 

The winter demand doldrums continue to show up in cash markets around the country, with diesel differentials in both the Group 3 and Chicago markets dipping below 45 cent discounts to futures, despite a handful of refinery hiccups reported due to winter weather and power outages over the past week. Those heavy discounts are offering a big incentive to anyone creative enough to find a way to move barrels from the middle of the country to the East or Gulf Coasts.

While the weak values in the mid-continent are a big story so far this winter, weakness in San Francisco stole the show Monday as prompt diesel basis values plunged more than 22 cents on the day and are currently valued around 35 cents below February HO. Some of that weakness may be an anomaly due to the end of January pipeline scheduling and we may well see a big bounce as traders shift to February, but there are plenty of reports in the region of terminal supplies swelling and Kinder Morgan cutting pipeline batches as a result, so the weakness certainly has some potential to stick around a while. 

Meanwhile, Los Angeles traders seemed unimpressed by reports that Marathon’s Wilmington facility had been taken offline with prompt differentials for both gasoline and diesel finishing slightly lower on the day.

RIN prices have dipped to a 3 year low this week at or below $.75/RIN for both D4 and D6 values as the rapid increase in Renewable Diesel output continues to add more supply of physical diesel and RINs.  In addition, California’s LCFS values have dropped to a new multi-year low below $60/credit this week, putting more pressure on renewable producers who depend on the combined subsidies provided by RINs, the $1/gallon federal blender’s tax credit (aka BTC, which ends this year), LCFS credits and the amount charged for CCA costs in order to stay profitable. As the chart below shows, the decline in RIN and LCFS prices over the past year makes the outlook for those producers much less appealing, especially knowing that the BTC will be going away next year.

The lower RIN values is typically good news for US refiners who bear the burden of complying with the Renewable Fuel Standard, but given the impact of new competing refinery output, a new outlet for Canadian crude and sluggish demand, those lower RIN values still may not be enough to keep some facilities from contemplating run cuts this year.   

Speaking of which, the CEO of Pemex said over the weekend that the long-awaited Dos Bocas refinery on the southern Gulf of Mexico coast will reach its fully capacity in March.  That would mean a new 340,000 barrels/day of throughput for the country that bought more than 700,000 barrels/day from the US last year and would inevitably back up barrels into the US if it ever actually happens. 

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Market Talk Update 1.23.24

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Pivotal Week For Price Action
Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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Pivotal Week For Price Action
Market TalkWednesday, Feb 21 2024

It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

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