The Drop In Diesel Prices Is Being Blamed On The Economic Slowdown In Europe

Market TalkWednesday, Oct 25 2023
Pivotal Week For Price Action

ULSD futures are trading lower for a 4th straight day with early losses around 3 cents for the November contract, marking a 20 cent drop from Friday’s highs. RBOB gasoline futures are heading the opposite direction in the early going, with 2.5 cent gains taking back some of yesterday’s big losses.

Much of the drop in diesel prices is being blamed on the economic slowdown in Europe, which was highlighted this week by weak manufacturing and spending data from Germany and France. The diesel weakness isn’t limited to futures trading, with basis markets across the country moving lower this week, and most regional cash markets trading now trading at a discount to futures. 

Headlines continue to suggest that de-escalation of the war in Gaza is the reason prices have pulled back, even though attacks on US and Israeli targets from Iran-backed groups has surged in recent days. Perhaps more important than the diplomacy hopes is that Saudi-Arabia’s long time opponent Yemen fired cruise missiles that were intercepted by a US naval ship and Saudi defenses, which is a sure sign that the world’s biggest oil exporter is unlikely to join forces with the Iranians as they did 50 years ago.

The API reported inventory declines across the board last week with gasoline stocks down 4.2 million barrels, diesel down 2.3 million and crude oil down 2.7 million barrels. The EIA’s weekly report is due out at its normal time today, but the agency has given notice that its reports two weeks from now will be delayed to complete a system upgrade. 

China is reining in the rampant refinery expansions we’ve seen the past couple of years, by setting a national capacity cap and minimum size limits on new facilities. It appears that these new regulations won’t impact the new facilities under construction, so near term, the country is still poised to control the refined product trade flows to and from Asia, depending of course on what the Politburo allows those facilities to do.

A Bloomberg opinion piece this week highlights the recent challenges for gasoline margins at the refining level, and notes how the Middle East flare up makes the rationalization process for refining more complicated. For those that prefer the cliff notes version: “The economically rational response would be to close less competitive refineries, leaving room for the largest, most advanced plants to run profitably. But 50 years on from an attack on Israel that sparked the first oil crisis, and with the Middle East in turmoil once more, economic rationality counts for only so much in a world where energy security is again in focus. Pressure on gasoline margins will challenge governments as much as it will refiners themselves.”

Valero reported an upset at its Three Rivers refinery in South Texas Thursday, with unplanned flaring expected to last 24 hours. This comes a day after a power loss impacted multiple facilities in the Corpus Christi area.

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Market Talk Update 10.25.2023

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Market TalkFriday, May 24 2024

Selling Continues In Energy Markets After Thursday's Reversal Rally Ran Out Of Steam In The Afternoon

The selling continues in energy markets after Thursday’s reversal rally ran out of steam in the afternoon, following the lead of U.S. equity markets which had a big sell-off on the day. Prices haven’t yet fallen below the multi-month lows we saw early last week, but we’re just a couple of cents away from those levels, and the potential technical trapdoor that could lead to sharply lower values over the next couple of weeks.

We did see a brief spike in gasoline futures after the settlement Thursday following reports that Colonial had shut down Line 4 due to an IT issue, but those gains were short-lived as the pipeline was restarted without issue a few hours later. Those who remember the chaos of May 2021 after Colonial was hacked are breathing a sigh of relief, particularly on one of the busiest demand days of the year, while others are no doubt disappointed we won’t get to see the rash of fake photos of people filling up plastic bags with gasoline.

OPEC & Friends (AKA the DoC) announced they’re moving June’s policy meeting to a virtual-only affair, which the market is taking as a signal of the status quo being held on output cuts.

Chicago being Chicago: Tuesday’s 60-cent basis spike was officially wiped out by Thursday afternoon, suggesting the short-lived rally was just short covering in an illiquid market rather than a meaningful supply disruption.

RIN values continued their rally this week, touching a 4-month high at 59 cents/RIN for both D4 and D6 values Thursday. If you believe in technical analysis on something like RINs, you can see a “W” pattern formed on the charts, suggesting a run to the 80-cent range is coming if prices can get above 60. If you are more of a fundamentalist, then you’ll probably think this rally is probably more short-term short-covering by producers of RD who have changed their schedule buying back their RIN hedges for volume they’re no longer planning to produce.

NOAA issued its most aggressive Hurricane forecast ever Thursday, joining numerous other groups that think a La Nina pattern and record warm waters will create more and bigger storms this year. With the activity level seeming to be a foregone conclusion at this point, now it’s all about where those storms hit to know if this busy season will be a huge factor in energy supplies like we saw in 2005, 2008, 2012 and 2017. With the Houston area already being bombarded by floods and deadly wind this year, the refinery row across the U.S. Gulf Coast seems even more vulnerable than normal to the effects of a storm.

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Pivotal Week For Price Action
Market TalkThursday, May 23 2024

Gasoline Prices Have Finally Found A Bid, Trading Up 3 Cents On The Day

Gasoline prices have finally found a bid, trading up 3 cents on the day after coming within a penny and a quarter of the multi-month lows set last week overnight. ULSD prices are also up a couple of cents in the early going after wiping out the gains they made last week. Both contracts are once again threatening a technical breakdown that could push prices another 20-30 cents lower if the current bounce isn’t sustained.

The EIA’s estimate for gasoline demand surged to a 7-month high last week, capping off a 4th straight week of gains that puts total consumption near the top end of the seasonal range after a very sluggish start to the year. AAA estimates that travel this Memorial Day weekend will approach a 20 year high with nearly 44 million people hitting the roads.

The EIA also published a note this morning showing average US gasoline prices are up 1% from last year, accompanied by a chart showing that average prices are down 7 cents/gallon from this time last year. The spread between retail gasoline prices on the West Coast vs the rest of the country continues to grow and is shown to be over $1.20/gallon thanks to Oregon and Washington’s Californication of their energy policies in recent years.

The EIA still seems to be struggling to figure out its accounting methods for crude oil inventories, with the adjustment factor that’s been creating all sorts of confusion the past couple of years flipping from a negative 200,000 barrels/day last week, to a positive 1.4 million barrels/day this week. You could give the EIA compilation crew a break and say that this reflects just how large and complex the US crude oil supply network is, or you could ask how did they suddenly “find” 10-million barrels of oil that they didn’t see last week.

Refiners are cranking up run rates, exceeding the levels we’ve seen this time of year in either of the past 2 years. Those higher run rates are added to the glut of diesel products that’s hanging over the majority of the country, and pushing rack spreads to levels we haven’t seen since the COVID lockdown in several markets.

The export market for US crude and refined products remains very busy with nearly 10 million barrels shipped out of the country every day. Refinery throughput was 16.2 million barrels/day last week, and more than 6 million barrels/day was exported even though gasoline and diesel exports have stagnated this year. The anticipated tick higher in US diesel exports following the rash of Russian refinery attacks has not materialized, which is no doubt contributing to the negative sentiment for diesel prices over the past month. The busy and growing export market for crude and other products also creates an interesting dynamic as we prepare for a busy hurricane season to kick off in a week as any disruption to infrastructure along the Gulf Coast could limit product going out of the country almost as much as it disrupts products flowing inland.

Basis values for RBOB in Chicago dropped 30 cents Wednesday after Tuesday’s 60 cent spike. It’s still unclear what if any impacts the confirmed fire at Exxon’s Joliet refinery, or the rumored upsets at BP’s Whiting facility have had on actual supply in the region, but the quick pullback suggests this is a flash in the pan rather than the start of a prolonged supply shortage.

Exxon reported a leak at its Beaumont TX Chemical plant, but it appears that upset isn’t impacting the operations at its adjacent refinery.

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