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.
Click here to download a PDF of today's TACenergy Market Talk.
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.

Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.
