Diesel Prices Have Hit A Record High This Morning
Diesel prices have hit a record high this morning as global markets are experiencing a Lord of the Flies moment as they come to terms with the shortage of oil products, both edible and fossil.
RINs are rallying to their highest levels in almost a year as Indonesia’s palm oil export ban was expanded to include unrefined oils, which is setting off another frantic scramble for replacements to process all sorts of foods, fuels and other products.
While ULSD futures have reached all-time highs, only the NY Harbor spot market is trading above where it peaked out in March, while other cash markets around the US are still well below their peaks. The extreme backwardation that has been well documented over the past month is a primary driver of this spread between markets, and also makes resupply a challenge when there’s a 70 cent price drop looming in the next 30 days.
Prompt diesel prices in the Chicago market are trading more than $1/gallon below those in the NY Harbor, so if you live in PA you might notice a few more tankers heading east this week as those with both the supply and the freight capacity could net $5,000 or more per load. While it’s not unusual to see Chicago trade at steep discounts to neighboring markets at times, it is unusual to see San Francisco spot diesel trading nearly $1 below NYH values, especially given the reduction in operable refining capacity in the bay area in recent years.
The big question for the months ahead is whether the other US markets will rally to meet New York, or if New York will collapse to get in line with its neighbors. It seems likely that 80 cent backwardation won’t last long (just as 15 cent backwardation which shocked the world in 2008 didn’t) and the divergence between regional markets can often be the precursor to a trend reversal. That said, total US diesel inventories remain well below their normal range, and international buyers are frantic, so it’s much too soon to say this rally is coming to an end.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.