Refined Product Futures Drop Despite Refinery Run Slowdown

Market TalkThursday, Feb 16 2023
Pivotal Week For Price Action

Diesel prices were trying to lead the energy complex lower again to start Thursday’s trading, with gasoline and crude prices somewhat reluctant participants in the modest slide after staging a solid comeback in Wednesday’s session.

The DOE reported a huge build of more than 16 million barrels of crude oil Wednesday, which added to the selling pressure that had started earlier in the morning. Roughly 10 million barrels of the increase can be accounted for by increases in imports and decreases in exports, along with a large drop in refinery runs as plants start a busy spring maintenance schedule. The increase puts total commercial oil inventories above the seasonal 5 year range for this time of year, but factoring in the SPR, those inventories are more than 200 million barrels lower than a year ago.

Diesel was the only category to see an inventory decline on the week, so it was a little surprising to see ULSD leading the move lower in prices again, and ending the day with heavy losses even though gasoline prices staged a strong rally to end the day in positive figures.  The catch is that PADD 1 saw a build of 2.3 million barrels (6.7%) on the week as the ongoing warm weather has crushed demand for heating oil. Then again PADD 1 gasoline stocks saw a 3 million barrel build last week, which certainly doesn’t help explain the rally in RBOB to end the day.

Perhaps the biggest story of the week was that all PADDs 1-4 all saw declines in refinery output, and the net total for the US was a 2.5% drop in refinery runs for the week. It’s been reported for months that the US was scheduled to have much busier than normal refinery maintenance heading into the spring since so many facilities deferred work last year to capture record margins, and now it appears we’re there. While many markets around the country have returned to a state of calm, the rapid drop in output threatens to make things interesting again if demand starts cranking up again as spring approaches. So far this year we’ve seen demand for both gasoline and diesel stay well below both last year’s levels and their 5 year averages, which some see as a sign of the much-feared recession being upon us, while others dismiss as simply a sign of numerous winter storms that disrupted transportation without the cold needed to increase heating demand. 

PBF announced a JV partnership with Italian energy major Eni for its renewable diesel facility (which Europeans refer to as Hydrotreated Vegetable Oil) located at its refinery in Chalmette LA. Eni is putting up more than $880 million in capital to the facility, which is expected to produce 20,000 barrels/day of RD aka HVO later in 2023, along with new feedstock sourcing options outside of the US (Sicilian Olive Oil perhaps?). The facility will now be referred to as Saint Bernard Renewables (SBR)

Last year German utility Uniper had to be bailed out due to the spike in energy prices across Europe, and now has announced it is selling its refinery in the UAE to meet part of the terms of that bailout agreement.  Adding insult to injury, natural gas prices have dropped so much recently due to a warm winter that many suppliers are now facing a glut of supply that may costs billions to liquidate. 

Flint Hills reported a 2nd issue this week at its Corpus Christi refinery to TX regulators. This time a gas oil leak was detected inside the dike area surrounding a tank. No word if this leak could be related to the issue over the weekend that caused fuel to be found in a storm water drain, or if any production units were impacted for the facility that is a key supplier to the San Antonio, Austin and DFW markets.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk Update 02.16.2023

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action