Deisel Prices Exploding Higher As Sanctions Tighten On Russia's Energy Companies

Deisel prices are exploding higher Thursday, standing some 26 cents higher than they were less than a week ago as U.S. and EU leaders tighten the screws on Russia’s energy companies, and refineries continue exploding across Russia and its allied countries. Approaching 8am central, ULSD futures were up a little 13 cents while RBOB futures are up around 7. The spike higher sets the late September high of $2.44 as the next target for ULSD to determine if this is a serious rally or just the latest knee-jerk reaction to sanctions that may not do a whole lot.

In addition to the fundamental concerns, keep in mind that speculative short interest (bets on lower oil prices) reached a 1 year high last week for Brent crude (U.S. data hasn’t been published for 3 weeks due to the government shutdown) and there’s no doubt that some funds are being forced out of those losing positions, which can create a snowball effect of buying known as a short covering rally.

The plot thickens: Romanian intelligence announced it had foiled a Russian sabotage attempt last week that intended to set explosive devices at the headquarters of a courier company. The announcement came just a day after a mysterious explosion at a refinery in Romania owned by Russia’s Lukoil. While many believed Ukraine may have targeted the refinery as it’s one of the few European plants still buying and processing Russian crude, these other events make it seem possible that Russia may be attempting to stir the pot to turn sentiment in Europe against Ukraine.

Lukoil and Rosneft, Russia’s two largest oil companies, were specifically targeted in the latest round of U.S. Treasury sanctions, after the meeting between the U.S. and Russian presidents was cancelled. The filing lists out specific refineries owned by both companies that fall under the latest round of sanctions, none of which you can probably pronounce. While the news is obviously roiling markets this morning, there are still plenty of loopholes that can allow Russian barrels to reach the market, and plenty of oil at sea already, so it’s unlikely to create anything resembling a physical shortage anytime soon.

EU’s leaders have passed a 19th package of sanctions targeting Russia’s businesses, and while the first 18 obviously haven’t stopped the war, the most notable change in this latest round is explicitly excluding Russian LNG imports. Not coincidentally, Hungary has announced it is starting negotiations with the U.S. to replace the Russian energy supplies it depends on.

Meanwhile, there are conflicting stories on whether or not the U.S. has approved the use of long-range missiles by Ukraine’s forces within Russia that would expand their capabilities to reach Russian refineries and other assets. The WSJ says they have been approved, while Reuters says they have not. Meanwhile, two more Russian refineries were hit by drones overnight.

Midwestern gasoline prices have sold off heavily the past two days following a big spike last Friday in the wake of a fire at the 440mb/day BP Whiting refinery. The big drop in basis values this week suggests the plant is returning units to service, even though no official updates have been provided.

Tropical storm Melissa continues to slowly churn through the Caribbean and is expected to reach Hurricane status over the weekend, and major hurricane status by Monday according to the NHC. Odds are still low that this storm will impact the U.S. coast as it hooks north and east next week, but south Florida may feel some impacts, and the European model still has some projection models that suggest a move towards New England is possible next week is possible. See the ECMWF ensemble chart from Weathernerds below.

Notes from the DOE’s weekly status report:

Refinery runs came back strong to draw on crude inventories, but import/export flows held the decrease in check. Crude balances remain low across the country with PADD 4 being the only region with above average storage levels, only accounting for about 6% of the total. Run rates increased in all PADDs and pushed the U.S. total back towards the high end of its chart after last week’s drop off. However, PADD 5’s increase was minimal and remains just below the bottom end of its seasonal 5-year range.

Diesel stocks slid despite most factors pointing towards a build, particularly the lowered demand. PADDs 1 & 2 fell closer to 2023 levels while the rest increased to stay ahead of their 5-year averages. Gasoline inventories declined across all PADDs but 5 with exports increasing to a level not seen since the end of 2018. PADD level storage continues to run around average levels in all PADDs except 3, which is at the low end of its range, and 5 which is near the top. Ethanol stocks declined again despite continued increases in production, although exports did somewhat cut into those gains.