Diesel Prices Continue To Try And Lead The Energy Complex Higher This Week

Market TalkTuesday, Oct 18 2022
Pivotal Week For Price Action

Diesel prices continue to try and lead the energy complex higher this week, as the world continues to have few answers to a shortage of natural gas and distillates, while gasoline and crude oil prices are resisting that pull and moving modestly lower. 

Equity markets are pointing to large gains to start the day, setting new highs for the recovery rally since bottoming out last Thursday, but still not breaking the longer term downward trend. The correlation between daily swings in US stock indices and energy contracts has fallen apart in the past couple of weeks, so the rally seems to be having little if any impact on fuel prices so far. 

Basis markets around the country remain chaotic as traders deal with supply that swings between famine and feast on a weekly basis, and big swings in calendar spreads on futures that raise the level of difficulty substantially.  California continues to be the diva of the cash markets, with LA CARBOB now trading negative, marking a $2.50 drop so far in October. No word yet if regulators will investigate the cause of this price drop. West Coast diesel values meanwhile continue to trade at big negative values ahead of the roll to November physical trading which moves prices to the December futures contract reference point which is nearly 42 cents cheaper.  

NY Harbor ULSD continues to disconnect from the rest of the country, with prompt values going for nearly 80 cents more than the neighboring USGC and Chicago markets and more than $1/gallon above those on the West Coast. Delta’s refinery in Monroe PA is reportedly restarting after planned maintenance which should help alleviate the latest short squeeze on East Coast distillates, and those high prices are certainly opening arbitrage windows from several markets around the world, so we will see another price collapse at some point, but it’s hard to say when, or how long this latest dip will last.

New reports are out this morning that the White House will announce more releases from the SPR, with an estimate of 10-15 million barrels, which won’t last long at the current pace of around 1 million barrels/day. That release, if true, would be less than 8 percent of the total already announced for the year, although with nearly half of the reserve already depleted, the strength of this lever to [NOT win elections] combat price increases is decreasing. The same reports also suggest that a decision on limiting fuel exports will wait until after the elections. It’s worth noting the White House already ruled out a ban on natural gas exports, due to its numerous pledges to come to Europe’s aid, so it’s hard to see a ban on distillates, although restrictions on certain types of fuel (like gasoline) or limiting the destination countries could still be in play to try and show they’re trying to combat high gasoline prices without limiting refiners ability to run full out. 

Meanwhile, the simplest solution to some of the domestic supply bottlenecks, a widespread waiver on the Jones Act, remains a political non-starter although a waiver for LNG shipments to Puerto Rico was just approved to aid in Hurricane recovery efforts.    

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

Market Talk Update 10.18.2022

News & Views

View All
Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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 TalkWednesday, Nov 30 2022

Energy Markets Are Seeing A Strong Rally For A 2nd Day

Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower. 

Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam. 

The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally. 

Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse. 

OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October. 

The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.

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

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Week 48 - US DOE Inventory Recap