Diesel Prices Are Falling For A 4th Straight Day

Market TalkThursday, Feb 15 2024
Pivotal Week For Price Action

Diesel prices are falling for a 4th straight day and have wiped out 2/3s of the 30 cent gains made during last week’s 5 for 5 price rally, as the EIA and IEA reports both threw cold water on the bulls plans for a spring rally. RBOB gasoline futures were dropping for a 2nd day, giving up 12 cents in less than 24 hours, but were attempting a come-back to trade near breakeven for the day around 8am.

Adding to the bearish sentiment this week are reports that the huge new Dangote refinery, which is the main wild card for Atlantic Basin refining capacity this year is offering its first export cargoes. If you read closer however, you’ll note that the exports are for unfinished products, suggesting that the downstream units needed to produce finished gasoline and diesel aren’t yet up and running.

Consistent with the pattern for most of the past year, the IEA took a much more bearish tone than OPEC in its monthly oil market outlook, noting that global demand growth is losing momentum. The IEA’s report highlighted the impact of the January freeze event on oil and refining operations but predicted that we’ll see refinery runs in the US bottom out in the next week or two before accelerating into spring. Both reports are consistent in their supply growth estimates however, with global oil output expected to set a new record this year, with the US, Canada, Guyana and Brazil leading the way, and keeping a cap on the call for OPEC’s supply, while the shipping disruptions in the Panama and Suez canals will help keep prices backwardated.

Notes from the DOE’s weekly report:

Crude oil inventories had a large build as expected last week with 450mb/day of refinery production from BP’s Chicago-area refinery shutdown, and a positive reversal of the crude oil correction factor both driving the big increases. 

The price reaction following the report was decidedly bearish with both RBOB and ULSD losing roughly a dime following the report, which estimated that US fuel demand dropped sharply last week.  Of course, the government estimates on consumption are notoriously fickle, so the reaction could be more a sign that the bulls weren’t ready to carry through with the breakout threat they made last week.

Gasoline stocks in PADD 2 had reached an 8 year high prior to the Whiting downtime, which helps explain why prices aren’t having a bigger reaction to the extended shutdown of the region’s largest refinery. Those inventories are drawing rapidly now but remain in-line with the seasonal trend of inventories peaking in February, then declining sharply as we move through the spring RVP transition.

The situation is even more bearish for Midwestern diesel inventories which continue to hold at the top end of their seasonal range and roughly 15% above year-ago levels despite that refinery downtime, which is why we’re seeing cash markets in the Group and Chicago still hovering around 20 cent discounts despite a 500mb/day decline in PADD 2 run rates last week. The export market for diesel is looking sluggish as well, with outbound movements slumping below the 5-year average, despite reports that the Red Sea disruptions would drive more demand for products to move from the US Gulf Coast to Europe. 

One sliver of hope for diesel bulls is that the official demand estimate is understated by around 4-5% nationwide due to the EIA not recognizing RD in the weekly reports, but that reality also makes the PADD 5 diesel inventory chart below look awfully bearish when you realize that there’s more than 4 million barrels of diesel inventory not being recognized.

PBF reported a loss for Q4 this morning, underachieving most other refiners during the quarter. The company tried to sound upbeat in the report, noting that strong earnings earlier in the year had allowed them to shore up their balance sheet. Most noteworthy on the margin front was that the Toledo facility operated at a negative gross margin of $1/barrel during the quarter, detailing just how brutal those big negative basis values really can be for refiners, while their East Coast and Gulf Coast facilities operated at less than $5/barrel of gross margin, which wasn’t enough to cover operating costs. The company’s renewable diesel JV also produced below expectations, but that was blamed on a catalyst change rather than the softer margins given the collapse in RIN values last year.  

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk Update 02.15.2024

News & Views

View All
Pivotal Week For Price Action
Market TalkFriday, Jun 21 2024

Charts Continue To Suggest We’re In For A Period Of Sideways Trading

It’s another quiet start for energy markets that seem to have entered the summer doldrums where peak gasoline demand for the year meets peak disinterest as many in the industry start taking vacations. Charts continue to suggest we’re in for a period of sideways trading now that the big June recovery bounce seems to have run out of steam.

Tropical storm Alberto dissipated over Mexico Thursday, but not before its far-stretching thunderstorms upset another refinery in the Corpus Christi area. Flint Hills reported a boiler was knocked offline at its East Corpus refinery, a day after Citgo reported an upset at its East facility as well. Large parts of Texas have been swimming in supply most of the year as neighboring markets to the North and West have been long, backing up barrels into the Lonestar state so these small upsets are unlikely to move the needle in terms of prices or allocations in the area, but they are a good reminder of how vulnerable these facilities are to the weather. The NHC is still tracking 2 more systems with coin-flip odds of being named in the next few days, but neither one looks like it’s headed for the oil production and refining zones in the Gulf Coast at this point.

Ukraine continues to pound Russian energy infrastructure, with 4 different refineries reportedly struck overnight, following attacks on multiple export facilities earlier in the week. The global market continues to largely shrug off the attacks, as excess refining capacity in Asia seems more than capable of picking up any slack in the supply network that may be caused by a loss in Russian output, which is a very stark contrast to what we were experiencing 2 years ago.

Another dip in capacity: The EIA reported a drop of 103mb/day of refining capacity in the US last week, the first reduction in capacity reported since before Russia invaded Ukraine. A general drop in capacity came as no surprise as the conversion of the P66 Rodeo refinery in the San Francisco Bay area earlier this year was well documented. The surprise in the figures was that the East Coast made up 40% of the total decline, which may suggest those facilities which are generally disadvantaged due to labor costs and limitations in crude oil sourcing, are once again knocking on death’s door after a 2-year reprieve.

With the conversion of Rodeo, PADD 5 now has the least amount of refining capacity since the EIA started tracking that stat 40 years ago. Right on cue, the DOE also reported PADD 5 gasoline imports surged to the highest level in over 3 years last week, offering a glimpse of what lays ahead as the region will now be more dependent on shipments from across the Pacific to meet local demand.

Speaking of which, lobbying groups are filing responses to California Energy’s workshop proposals on new refinery rules to cap profits, using the forum to tout the advantages of whatever product they’re selling, and highlighting the risks of the state making itself a fuel island dependent on imports from overseas.

Another one bites the dust? BP “is pressing pause” on its biofuel project at its Cherry Point WA refinery this week, the latest in a line of biofuel producers to rethink plans to make diesel from soybeans and waste oils as subsidies have plunged. On top of plummeting LCFS and RIN values that have cut nearly $2/gallon out of the credit values of the fuel that costs $3-$4/gallon more than traditional diesel, the new Clean Fuel Production Credit is replacing the $1/gallon Blender’s Tax credit that’s been the lifeline to many producers over the past decade. The new program (which is part of the Inflation “Reduction” Act) sets a higher bar to clear before producers can get their handout, which means some domestic facilities will see another loss in credit values from 50-80 cents/gallon vs the BTC, while importers won’t qualify for any credit under the new program.

For real this time? Mexican officials continue to make up stories about when their new Dos Bocas refinery will begin producing fuels, kicking the can further down the road this week saying the facility will start up in the back half of the year. This is at least the 10th time officials have moved back the start date of the facility over the past few years and given that the back half of the year starts in 10 days, I’ll take the over on this bet. Refiners along the US Gulf Coast are no doubt celebrating anytime another delay is announced as they’re facing more competition than they have in the past two decades for their exports.

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
Market TalkThursday, Jun 20 2024

Week 24 - US DOE Inventory Recap

Market Talk Updates - Social Header
Market TalkThursday, Jun 20 2024

Energy Futures Giving Back Yesterday's Holiday Shortened Session Gains

Energy futures are giving back almost all of the gains made during yesterday’s holiday-shortened session as a search for direction begins to emerge after crude oil and diesel prices reached 7-week highs. Charts suggest we may be in for a few weeks of sideways trading unless buyers can push prices up another 5-10 cents before the month's end.

A reminder that since futures didn’t settle yesterday, the price change you’re seeing today is relative to Tuesday’s close. Spot markets weren’t assessed yesterday. The DOE’s weekly status report will be released at 11 am Eastern.

Tropical storm Alberto was finally named Wednesday after a couple of days of a “potential tropical cyclone” label. While the storm is already moving inland over Mexico, it is having widespread impacts with parts of Texas already declaring states of emergency to deal with flooding.

Yesterday we mentioned that the heavy rains brought by this system may interfere with restart efforts at Citgo’s Corpus Christi West refinery, but it was actually their East Corpus Christi plant that reported flaring due to the “heavy rainfall event.” No units were reported to be shut from that upset, and if the refiners in the area can make it another 12 hours, they’ll have dodged their first storm bullet of the year.

Although the forecasts all said this would be an extremely busy year for storms, Alberto was actually the latest named storm in the Atlantic basin for a season in 10 years. Don’t worry though, it looks like we’ll quickly make up for lost time with two more systems being tracked. One on Alberto’s heels is given 50% odds of being named as it moves into the Gulf of Mexico this weekend, while the other lingering off the SE coast is only given 40% odds, but is still set to bring heavy rain to Florida, Georgia and the Carolinas.

The treasury and IRS published guidance on the Prevailing Wage and Apprenticeship (PWA) requirements for renewable fuel facilities to qualify for the new Clean Fuel Production Credit (CFPC) that will replace the blanket $1/gallon Blender’s Tax Credit next year. Without reaching the PWA standards, producers can get a maximum of $.20/gallon for Biodiesel and RD, and $.35/gallon for SAF. If a producer meets the PWA guidelines, they can theoretically earn 5 times the base amount, for a maximum of $1/gallon for RD and Bio and $1.75 for SAF. The actual amount will be calculated by multiplying the maximum credit times the fuel’s emissions factor, meaning many producers will earn much less than the current $1/gallon credit. It’s also worth noting again that importers will not qualify for the CFPC after many years of earning the BTC, which may shake up the supply outlook later this year as anyone who can, will race to dump their barrels into a US market before the credit goes away.

Click here to download a PDF of today's TACenergy Market Talk.