Diesel Prices Hit Lowest Level Since January 2022 Amid Technical Support Failure, Shortages Persist in Southwest US

Market TalkWednesday, Apr 26 2023
Pivotal Week For Price Action

Diesel prices are trading at their lowest levels since the first week of January 2022 this morning after technical support around the $2.50 level failed to hold in Tuesday’s session, dragging the entire energy complex sharply lower. Tuesday’s US Consumer confidence report showed the lowest reading in 9 months, adding to the bearish sentiment for energy and equity markets. 

Contango is back: The drop in prompt prices for distillates coincides with a collapse in the forward curve with prices for November and December ULSD currently trading 2 cents higher than May and June contracts. This time last year, prompt ULSD was trading at a premium of more than $2/gallon above 1 year forward values and today that premium has dropped to less than a penny/gallon as the world has finally figured out a work-around to the Russian supply conundrum

Just don’t tell people in Arizona or New Mexico that diesel prices are cheap. Rack prices in those states continue to be offered north of $3.50/gallon as shortages across the Southwestern US persist. West Texas and Nevada are seeing similar price spikes as pipeline resupply options simply aren’t able to make up for the refinery downtime in the region, which has seen a few other smaller facilities convert to renewables production or shut down completely in recent years.  Arizona’s low RVP CBG grade gasoline is going for $4.50/gallon in Phoenix, while spot prices for that boutique grade in LA are trading at $2.90.

While not nearly as extreme as what we’re seeing in the Southwest, values for diesel in the Group 3 market have been on a rollercoaster ride the past two weeks, with differentials fluctuating by 10-20 cents daily with premiums north of 40 cents and below 20 being talked on any given day. Here too, refiners trying to supplement supplies during maintenance, with fewer options now than in years past continues to be the underlying theme.

The Superior Wisconsin refinery is back operating under new ownership 5-years to the day after it blew up and forced a partial evacuation of that town. The refinery rebuild took 2 years longer and cost 3 times the original expected amount. Given the relatively small size and isolated location of that facility, don’t expect it to have any noticeable impact on spot prices in the region.

An explosion Tuesday at an asphalt facility in Lemont IL killed 1 worker and sent another to the hospital. That facility is adjacent to Citgo’s Lemont refinery, but refinery operations were not expected to be impacted. The terminal rack was temporarily taken offline following the explosion, but was brought back online by the afternoon.

The API reported an inventory decline of 6 million barrels for crude oil last week, even though more sales from the SPR continue, while gasoline stocks dropped by 1.9 million barrels and distillates increased by 1.7 million barrels. That report probably helps explain the relative strength for RBOB and WTI futures vs ULSD this morning. The EIA’s weekly report is due out at its normal time. 

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Market Talk Update 04.26.2023

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Pivotal Week For Price Action
Market TalkFriday, Feb 23 2024

The DOE Report Sparked A Solid Rally In Energy Futures Thursday, But That Upward Momentum Proved Short-Lived

The DOE report sparked a solid rally in energy futures Thursday, but that upward momentum proved short-lived as prices gave back those gains overnight, despite US equity markets surging to all-time highs.

The weekly inventory report showed US refiners are struggling to come back online from a busy maintenance season that was further complicated by January’s cold snap and the unexpected shut down at BP Whiting. Refinery utilization held near 80% on the week, which helped pull gasoline inventories lower despite sluggish demand and a surge in imports along the East Coast. Diesel demand showed a big recovery from last week’s ugly estimate, and when you factor in the missing 4-5% that doesn’t show up due to RD not being included in the reports, actual consumption looks much healthier than the report suggests.

Based on reports of restarts at several major refineries this week, we should see those utilization numbers pick up in next week’s report.

The EPA Thursday approved year-round E15 sales in 8 corn-growing states, despite the fact that the extra ethanol blends have been shown more to pollute more in the warm times of the year. The effective date was pushed back a year however in a show of election-year tight rope walking, which the EPA couched as ensuring that the move wouldn’t lead to a spike in fuel prices this summer.

Of course, the law of unintended consequences may soon be at play in a region that tends to be long gasoline supply for large parts of the year. Removing 5% of the gasoline demand could be another nail in some of the smaller/less complex refineries’ coffins, which would of course make fuel supply less secure, which contradicts one of the main arguments for making more 198 proof grain alcohol and selling it as fuel. Ethanol prices meanwhile continue to slump to multi-year lows this week as low corn prices continue to push unusually high production, and the delayed effective date of this ruling won’t help that.

While Nvidia’s chip mania is getting much of the credit for the surge in equity prices this week, there was also good news for many more companies in reports that the SEC was planning to drop its requirements on Scope 3 emissions reporting which is particularly useful since most people still can’t figure out what exactly scope 3 emissions really are.

In today’s segment of you can’t make this stuff up: The case of chivalry gone wrong with the BP/TA acquisition, and a ketchup caddy company caught spoofing electric capacity.


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Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

Week 7 - US DOE Inventory Recap

Pivotal Week For Price Action
Market TalkThursday, Feb 22 2024

RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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