Refined Product Futures Drop Despite Refinery Run Slowdown

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.
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Energy Markets Are Holding Steady To Start Tuesday’s Session
Energy markets are holding steady to start Tuesday’s session after oil prices had their biggest rally of the year Monday.
Reports that Iraq had halted shipments on the Ceyhan pipeline through Turkey, which removed 400,000 barrels/day of exports from the world market temporarily were given much of the credit for the big move higher. The rally in oil came just a week after large speculators reduced their bets on higher prices to the lowest level in 7 years, providing yet another reminder of why the moves made by hedge funds is often seen as a contrary indicator of market direction.
Refined products touched a 2-week high overnight before pulling back to modest losses this morning but remain in the middle of their March trading range, which sets the stage for more choppy back and forth action as markets around the world search for direction and worry about what’s coming next.
California approved the bill that will create a new committee within the state’s energy commission that will oversee oil refiners and potentially levy penalties on them if they’re deemed to be making too much money on consumers. The state has already had a handful of refineries close down in the past 6 years, with another scheduled to close and convert to an RD facility in early 2024, and there’s no doubt that this new law may be yet another reason for the remaining facilities to consider closing their doors as well, which many will see as a victory.
The Dallas FED’s manufacturing Survey showed a small increase in production in March, after February showed a contraction for the first time since the COVID lockdowns. The business outlook remains mixed however as many noted uncertainties around the banking situation, along with continued supply chain and labor challenges as factors hindering growth.
New competitor for feedstocks? A moose breached the security gates at the refinery in Sinclair Wyoming Monday. No word if the animal was just lost, or searching for the soybeans that are now being used to make renewable diesel at that facility.
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Energy Futures Rebound to Start the Week
Energy futures are bouncing to start the week, following through on a recovery rally that saw Friday’s early losses wiped out and salvaged weekly gains.
Money managers have been bailing out of their bets on higher energy prices in recent weeks, and as the CFTC’s data is finally catching up after 2 months of delays, we can finally see those figures the same week they’re compiled. The past two weeks alone have seen a reduction of more than 100,000 WTI contracts held by large speculators, bringing the total net length to the lowest level since January 2016.
The COT data also shows large reductions in producer hedging during this latest selloff in a sign that the industry may believe that prices won’t stay this low for long.
A WSJ article over the weekend highlighted how the options traders may have exacerbated the push lower over the past two months and could help spark a recovery rally later in the year.
Baker Hughes reported an increase of 4 oil rigs drilling in the US last week, snapping a 5-week slide that had pushed drilling activity to a 9-month low. The Permian basin accounted for 3 of the 4 rigs added last week.
Iraq won a 9-year lawsuit against Kurdish oil shipments, and that result has temporarily halted shipments of oil from the autonomous Kurdish region via the Turkish Ceyhan pipeline system.
Saudi Arabia announced an expansion of its partnership with China, increasing its multi-billion investment in new refining infrastructure in the world’s largest oil buyer. We’ve already seen multiple new refinery projects come online in both countries over the past two years, and this new agreement will continue the trend of additional capacity in the eastern hemisphere while the west continues to see declines.
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Correlation Confusion Between Oil, Stock, And Currency Markets; US Drops Plan to Replenish SPR
Oil prices are leading a slide lower to end the week after the US government walked back plans to buy oil since it’s dropped below $70, and the latest ripples in the banking crisis push stocks lower and the dollar sharply higher after it touched a 2-month low Thursday.
Even though the correlation between energy prices and stocks or currencies has been weak lately, or even opposite of normal in the case of the dollar, there still seems to be more influence lately as the fear trade has funds flowing back and forth between markets depending on whether or not risk-taking is in style that day.
The US Energy Secretary told congress that the agency won’t be refilling the SPR this year, despite previous pledges by the White House to buy oil when it dropped to $70, since the agency is still working through congressionally mandates sales of oil from the reserve. That news seems to be contributing to the downside in WTI and Brent prices as traders hoping to front run the DOE are now going to have to wait a while longer to do so.
Even though ULSD prices are up 17 cents from the lows set last week, they’re still on the verge of their lowest weekly settlement since January of 2022 should prices end the day near current levels. Given that this week’s recovery rally failed to take out the highs seen in previous weeks, charts continue to look bearish for distillates. Another run at $2.50 looks more likely and a break below that level, when the May contract takes the prompt position in another week, may be a foregone conclusion.
As has been the case for most of March, RBOB look as bad as ULSD on the charts, although that certainly isn’t helping so far today with gasoline futures outpacing the losses in diesel. Unless we see RBOB end the day down a dime or more (it’s down a nickel currently) the weekly trend will still be higher, and the charts will still be giving favor to another push towards $2.80-$3 this spring.
The LA spot market saw a healthy bounce in gasoline basis values Thursday following multiple refinery upsets in the area reported to local regulators. Meanwhile, the California Governors new plan to create an oversight committee to prevent price gouging – a major change from earlier proposals to levy a new tax on oil producers and refiners – passed through the Senate on Thursday. If this new bill is fully passed, it will allow the Governor to appoint that committee himself. A 1,000-page prediction of how that plan will work is available for less than $10 on Amazon.
Click here to download a PDF of today's TACenergy Market Talk.