The Downward Sloping Weekly Trend Lines Are Still Intact And Suggest There Could Still Be More Substantial Downside Ahead
ULSD is trying to lead the energy complex higher this morning, with December futures up a nickel in the early going but are once again finding RBOB and crude oil to be reluctant participants in the rally. Yesterday we saw RBOB and WTI give back healthy early gains and end lower for the day, and this morning they’re lagging far behind the gains in ULSD. The downward sloping weekly trend lines are still intact and suggest there could still be more substantial downside ahead.
Both HF Sinclair and PBF continued the theme of strong earnings, just not as strong as last year, in their 3rd quarter updates. PBF touted that its new SBR renewables unit was profitable in its first full quarter of operations (although it didn’t say how profitable) while HF Sinclair’s renewable segment clawed back above break even this quarter, vs a loss of $49 million a year ago. Both PBF and HFS highlighted the difference in refining operations by region, with Gulf Coast and Mid-Continent operations costing around $5-$6/barrel (10-12 cents/gallon) compared to $10-$12/barrel (24-28 cents /gallon) break even for their West Coast operations. That’s a big difference, but it’s still much lower than the 55 cent/gallon break even on the renewables segment, which shows the challenge the lower production rates of a renewable facility create.
Meanwhile, the reason for Lyondell’s slow rolling of the Houston Refining sale/shutdown decision became clear this week when the company confirmed that the facility would be part of the DOE’s new Gulf Coast hydrogen hub project. Oil refiners are a natural choice for those projects as they are already set up to take in large amounts of natural gas, and already have hydrogen production units that currently aid in stripping Sulphur out of their products.
While there’s no mistaking that Q3 was solid for US refiners, the 4th quarter is looking much more challenging 1/3 of the way through. Gasoline margins in particular are dragging down earnings, and while diesel margins are still enough on their own to keep facilities operating in the black, there’s reason to believe this could be a tough winter unless it’s a tough winter for weather to give diesel prices an extra boost.
Yesterday’s DOE report shows that gasoline demand continues to be sluggish, allowing inventories to keep climbing despite being in the midst of a busy turnaround season. As refiners return from maintenance, and we go through the seasonal slowdown for gasoline demand, it’s possible we could be talking about containment issues at some facilities and economic run cuts unless diesel values can hold strong.
Unfortunately for refiners, domestic diesel consumption isn’t looking very solid, with the DOE’s estimate dropping sharply for a 2nd straight week, below the 5-year range, while export activity remains sluggish. Of course, it’s still a challenge to get a real read on demand levels, or PADD 5 inventories, when the DOE’s data still does not include any renewable diesel figures, even though that product now makes up roughly half of all diesel sold in California.
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View All“Buy The Rumor, Sell The News” Seems To Be The Trading Pattern Of The Week
“Buy the Rumor, Sell the News” seems to be the trading pattern of the week as oil and refined products dropped sharply Thursday after OPEC & Friends announced another round of output cuts for the first quarter of next year.
Part of the reason for the decline following that report is that it appears that the cartel wasn’t able to reach an official agreement on the plan for next year, prompting those that could volunteer their own production cuts without forcing restrictions on others. In addition, OPEC members not named Saudi Arabia are notorious for exceeding official quotas when they are able to, and Russia appears to be (surprise) playing games by announcing a cut that is made up of both crude oil and refined products, which are already restricted and thus allow an incremental increase of exports.
Diesel futures are leading the way lower this morning, following a 13-cent drop from their morning highs Thursday, and came within 3-cents of a new 4-month low overnight. The prompt contract did leave a gap on the chart due to the backwardation between December and January contracts, which cut out another nickel from up front values.
Gasoline futures meanwhile are down 15-cents from yesterday’s pre-OPEC highs and are just 7-cents away from reaching a new 1-year low.
Cash markets across most of the country are looking soft as they often do this time of year, with double digit discounts to futures becoming the rule across the Gulf Coast and Mid Continent. The West Coast is mixed with diesel prices seeing big discounts in San Francisco, despite multiple refinery upsets this week, while LA clings to small premiums.
Ethanol prices continue to hold near multi-year lows this week as controversy over the fuel swirls. Corn growing states filed a motion this week trying to compel the courts to force the EPA to waive pollution laws to allow E15 blends. Meanwhile, the desire to grow even more corn to produce Jet Fuel is being hotly debated as the environmental impacts depend on which side of the food to fuel lobby you talk to.
The chaotic canal congestion in Panama is getting worse as authorities are continuing to reduce the daily number of ships transiting due to low water levels. Those delays are hitting many industries, energy included, and are now spilling over to one of the world’s other key shipping bottlenecks.
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No Official Word From OPEC Yet On Their Output Agreement For Next Year
Energy prices are pushing higher to start Thursday’s session after a big bounce Wednesday helped the complex maintain its upward momentum for the week.
There’s no official word from OPEC yet on their output agreement for next year, but the rumor-mill is in high gear as always leading up to the official announcement, if one is actually made at all. A Reuters article this morning suggests that “sources” believe Saudi Arabia will continue leading the cartel with a voluntary output cut of around 1-million BPD to begin the year and given the recent drop in prices that seems like a logical move.
We saw heavy selling in the immediate wake of the DOE’s weekly report Wednesday, only to see prices reverse course sharply later in the day. ULSD was down more than 9-cents for a few minutes following the report but bounced more than 7-cents in the afternoon and is leading the push higher this morning so far.
It’s common to see demand drop sharply following a holiday, particularly for diesel as many commercial users simply shut down their operations for several days, but last week’s drop in implied diesel demand was one of the largest on record for the DOE’s estimates. That drop in demand, along with higher refinery runs, helped push diesel inventories higher in all markets, and the weekly days of supply estimate jumped from below the 5-year seasonal range around 25 days of supply to above the high end of the range at 37 days of supply based on last week’s estimated usage although it’s all but guaranteed we’ll see a correction higher in demand next week.
Gasoline demand also slumped, dropping to the low end of the seasonal range, and below year-ago levels for the first time in 5-weeks. You’d never guess that based on the bounce in gasoline prices that followed the DOE’s report however, with traders appearing to bet that the demand slump in a seasonal anomaly and tighter than average inventories may drive a counter-seasonal price rally.
Refinery runs increased across the country as plants returned to service following the busiest fall maintenance season in at least 4-years. While total refinery run rates are still below last year’s levels, they’re now above the 5-year average with more room to increase as no major upsets have been reported to keep a large amount of throughput offline.
The exception to the refinery run ramp up comes from PADD 4 which was the only region to see a decline last week after Suncor apparently had another inopportune upset at its beleaguered facility outside Denver.
The 2023 Atlantic Hurricane season officially ends today, and it will go down as the 4th most active season on record, even though it certainly didn’t feel too severe given that the US dodged most of the storms.
Today is also the expiration day for December 2023 ULSD and RBOB futures so look to the January contracts (RBF and HOF) for price direction if your market hasn’t already rolled.
More refineries ready to change hands next year? With Citgo scheduled to be auctioned off, Irving Oil undergoing a strategic evaluation, and multiple new refineries possibly coming online, 2024 was already looking to be a turbulent year for refinery owners. Phillips 66 was indicating that it may sell off some of its refinery assets, but a new activist investor may upend those plans, along with the company’s directors.