Diesel Futures Leading Energy Complex At A 15 Cent Increase From Last Week

Diesel futures are trying to lead the energy complex higher to start the week trading up another 3 cents in the early going and standing some 15 cents above where they were last Monday as supply challenges and economic optimism coincide. Gasoline futures aren’t buying the optimism just yet, hovering just below break even this morning after their rally stalled out on Friday.

Ukraine continues to score hits on Russian energy infrastructure, with reports of damage to a major oil pipeline, nuclear facility, key export facility and multiple refineries over the weekend, which may be lending some strength to distillates as Europe may be forced to increase purchases from the U.S. to continue supplementing their supplies.

U.S. stock indices reached new record highs Friday after the FED chair signaled a clear path towards rate cuts this year, while continuing to preach caution. Equity futures are pointing lower this AM, however, which may be contributing to the cautious start for gasoline despite the pull from ULSD.

We took another ride on the RIN rollercoaster Friday after the EPA made a long-awaited decision on Small Refinery Exemptions (SRE) to the RFS, which explained the week-long delay in releasing their RIN generation data. After the previous administration had denied all petitions and creating an extended legal battle, the new EPA fully approved 36% of the requests, partially approved 44%, denied 16% and declared the last 4% ineligible. The fact that 80% of the SRE requests were granted at least some relief sparked an immediate selloff in RINs, with D6 values trading down a nickel to a low around $.99 before reversing course and trading up to $1.15/RIN in the afternoon.

One reason for the Friday RIN recovery rally is that most of the RINs that will be returned to those facilities granted an SRE are already expired and won’t flood the market, unlike in years past when refiners approved for an SRE were given the chance to generate new RINs to make up for their prior obligations. The EPA noted in its filing that were the agency to allow that RIN replacement to occur, it would flood the market with some 3 billion new made up credits that would lead to decreased RIN prices and decreased future investment, signaling the agency’s intent to protect the RFS program despite many calls for its removal. The other reason for the RIN rally is that the EPA suggested the SRE approvals may mean the agency will increase the renewable volume obligation for the next two years to offset the exempted volume, which was quickly met with protest by the refining lobby.

The July RIN generation data released at the same time as the SRE announcement showed small increases in D3 (renewable nat gas/cellulosic) D4 (Bio/RD/SAF) and D6 (old school ethanol) production. The biggest mover for the month came in the D5 (Advanced) RIN category which saw an increase of nearly 4 billion RINs generated, a 27% increase over prior months. The bulk of the increase in the lesser-known D5 category came from Renewable Naphtha production which is a byproduct of RD and SAF output. SAF production set a new record high last month but still accounts for only around 8% of total D4 production. Biodiesel output ticked higher in July after plummeting to a 10 year low to start the year as producers stopped operations when they lost the $1/gallon BTC, while RD production dipped slightly on the month after 2 months of increases.

Baker Hughes reported a drop of 1 active oil rig in the U.S. last week, snapping a 2 week streak of small increases, while the natural gas rig count held steady.

Money managers really aren’t liking WTI these days with the net length (bets on higher prices) held by the large speculative trade category slumping to a new 17 year low, a level we haven’t seen since the panic of the 2008 financial crisis. Of course, as is often the case with extremes in either direction with large speculators, it comes just in time for prices to reverse and could actually push prices higher as the new short positions are squeezed out of the market when prices rally as they’ve done over the past week. There is a fundamental difference this time however with the WTI delivery point in Cushing OK becoming less relevant as the US exports more crude oil, but the combined short positions in WTI and Brent still suggests that the hedge funds may be vulnerable to big pain with the latest bounce in prices.