Refinery Restart, Sell-Off in Equities Send ULSD Prices Lower
ULSD could not sustain a record-setting 12th day of increases Wednesday as a sell-off in equities and a refinery restart both contributed to a big reversal in refined products and the crude oil market shrugged off the biggest inventory decline on record.
Gasoline prices have dropped nearly 20 cents in the past 24 hours after the P66 Bayway restart drove PADD 1 refinery runs sharply higher for a 2nd straight week, alleviating concerns of a supply squeeze along the East Coast ahead of the fall RVP transition. The West Coast meanwhile is pointing higher as we approach the final summer-grade pipeline cycles of the year. So far, the 30-40 cent premiums are a far cry from the $2/gallon spreads we saw last August, but there could be more upside ahead as refiners will be reluctant to make more of a product that no one will want in a few weeks.
While ULSD futures saw a big outside-down reversal day Wednesday, setting a new high only to finish with a lower low and settlement than the prior day, prices are not collapsing like they are with gasoline, giving the bulls a chance to contain the selling into nothing more than an overdue correction after a record-tying 11 consecutive increases. The $3 mark may well prove a pivotal level psychologically as we end the week to determine if the rally resumes or if we just saw the high trade of the season earlier in the week.
The big reversal in refined products seems to coincide more with the selloff in equity markets the past two days following a downgrade of the US debt rating more than anything to do with the weekly inventory reports. The correlation between daily moves in energy futures and equity markets continues to hold at the strongest levels we’ve seen in 2.5 years now that global supply fears have eased, and the big question of the day is how the economy will drive demand.
Speaking of which, gasoline demand did see a small decline last week, but didn’t move the needle on inventories which only managed a small build and remain below year-ago levels. Diesel demand ticked higher for a 3rd straight week which is holding inventories close to the bottom end of the 5-year range in most markets.
The DOE reported a 17-million-barrel drop in oil inventories last week, the biggest decline in the 40+ years of the weekly status report. Nobody seemed to care much, in large part because nearly 14 million barrels of that decline was due to a change in the “adjustment factor” that’s code for “we don’t know what the real numbers are”.
The Q2 refiner earnings reports are shedding more light on the rapid expansion of Renewable diesel production. CVR Energy discussed plans to add a renewable diesel unit at its Coffeyville facility after a successful startup at its facility in Wynnewood OK, continuing the trend of refiners co-processing rather than converting that may be giving others shut-down remorse. Speaking of which, HFS announced another negative quarter for earnings in its renewables segment even though volumes have doubled in the past year. P66 meanwhile announced that it still on track with its Rodeo CA conversion, with commercial operations set to begin in Q1 2024.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
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View AllThe Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
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Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.