Diesel Prices Dive On Inventory Surge As Markets Eye Sanctions And Fed Outlook

It’s an uneasy start to trading Wednesday as the world holds their breath while a major tsunami threat passes, and traders try to determine what the latest round of sanction threats and EPA announcements may actually mean for their markets. Diesel prices are down around 4 cents approaching 8am central, wiping out yesterday’s gains, while RBOB and WTI are hovering near break even after yesterday’s strong moves higher.

The big drop in diesel prices overnight was blamed on the API’s estimates that diesel inventories swelled by more than 4 million barrels last week, while gasoline stocks declined by 1.7 million barrels. The EIA’s weekly report is due out at its normal time this AM.

Gasoline prices were already climbing Tuesday, and then spiked in the early afternoon after the US President told reporters he was shortening Russia’s window to agree to a ceasefire to “about 10-12 days” from the original 50 day window mentioned 2 weeks ago. Subsequent comments suggested that concerns over oil prices wouldn’t stop the US from issuing a new round of tariffs on buyers of Russian oil products.

In addition to the new threats of US sanctions, the recent EU sanctions targeting the refinery loophole on Russian crude supplies are having some impact as India’s 3rd largest refinery – which is 49% owned by Russia’s Rosneft - was forced to reduce run rates due to shippers no longer wanting to deliver crude to the facility, and a loss of their Microsoft services.

It appears that Russia’s oil exports haven’t been materially impacted by the strongest earthquake in 14 years that hit off of its east coast and prompted Tsunami warnings across the Pacific overnight. Warnings in Hawaii have already been lifted and the waves are hitting California as we speak. So far there aren’t any reports of disruptions at coastal refineries within the warning zone, and based on reports that the worst has already past, it seems unlikely that this will be a major disrupter for energy supplies.

The EPA is proposing removing the regulation that is the foundation for numerous emissions rules that attempt to limit the impact of greenhouse gases on the environment. The proposal still has to get through a lengthy open comment period before a final proposal, and if they do move forward it’s certain that the ruling would spend years being challenged in court. The big question for the fuel industry is whether or not this opens a window for manufacturers to loosen up on their programs and increase production of less fuel efficient vehicles that could slow the decline in gasoline consumption across the country.

The FED’s open market committee will make its latest monetary policy announcement at 1pm central. Hardly anyone expects the FOMC to change interest rates today, with the CME’s Fedwatch tool showing just a 2% probability of a rate cut based on futures markets. That outlook changes dramatically for September however with 2/3s of the money betting on at least a 25 point cut, with today’s strong Q2 GDP report that estimated 3% growth after a negative Q1 reading likely to increase those odds. If you dig into the details however you’ll note that the main driver of the GDP growth was a sharp decline in imports which was heavily influenced by the tariff chaos, and makes the data seem like much less of an indication of a strong economy than the 3% headline may have you believe. Most notably, a 3% drop in investment during the quarter is a likely indication of how serious the uncertainty is for businesses across the country.

Valero reported an upset at their Corpus Christi West refinery Tuesday, with multiple units apparently impacted and flaring that lasted 10 hours. The filing with the TCEQ said efforts were being made to return operations to normal.

Chevron’s Richmond CA refinery had a flaring event Tuesday afternoon that prompted county officials to issue a public health advisory. The all-clear was given just 33 minutes after the warning, with Chevron officials suggesting the notice was sent by mistake and wasn’t needed as the event was minor.