Gasoline & Diesel Are Rallying: Has The Complex Found a Floor
Diesel prices are rallying for a 4th straight session, while gasoline prices are moving higher for a 3rd straight day as lingering supply disruptions and optimism for demand seem to be helping the complex find a floor after a big selloff to start the year. Despite the recent gains, both ULSD and RBOB are still trading 10-15 cents lower than where they started the year, leaving the complex in technical no-man’s land unless they can continue this rally beyond those levels.
Strength in basis, calendar and crack spreads for distillates this week are all indicative of the near term supply challenges being faced by some refiners that are still struggling to get their operations back to normal following the Christmas blizzard. While none of these levels are approaching the huge values we saw last spring and fall, they are much stronger than we normally see this time of year.
The exception to this strength is seen on the West Coast where torrential rains have ground demand to a literal halt in some markets, and just a figurative one in others, but the local refineries weren’t knocked offline a couple weeks ago like so many others were east of the Rockies, which is making for some soft spot markets.
Add another US refinery to the scrap heap. The Phillips 66 Santa Maria refining facility closed last week, which went largely unnoticed since the facility was small at only 40,000 barrels/day and only partially refined crude for further processing at the company’s Rodeo facility near San Francisco, which is also scheduled to be shut down early next year and converted to RD production.
While the US continues to close and convert refineries, Asia and the Middle East continue to open new plants at a relatively fast pace. A new 140,000 barrel/day plant in Iraq is starting operations this week, with commercial production expected in March. That plant is the first new build in that country in decades, and adds to the new capacity brought online recently in Saudi Arabia and Kuwait that is shifting the flow of refined fuels globally from East to West.
The EIA’s monthly energy report forecast that the US will see GDP contract in Q1 and Q2 (which is AKA a recession) before resuming growth in the back half of the year. The report includes a new “between the lines” feature this month giving more insight into why the government sponsored analysts are predicting why oil prices will drop over the next 2 years. Hint: They see more supply than demand. Along with the drop in oil prices, the EIA is predicting that refinery margins will also contract thanks to the aforementioned increase in refining capacity elsewhere, which will help lower refined product prices over the next 2 years.
The API reported a huge build in oil stocks of nearly 15 million barrels last week, as Gulf Coast facilities no doubt opened their doors to imports they’d been holding off on until the new year, and refineries weren’t processing as much as planned due to the various disruptions. Gasoline stocks increased by 1.8 million barrels on the week and distillates increased by 1.1 million barrels, a sign of the typical winter demand doldrums we experience every year coming out of the holidays. The DOE/EIA’s weekly report is due out at its normal time this morning.
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View AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.