Diesel Rallies While Gasoline Struggles With Midwest Oversupply

It’s a mixed bag for energy markets to start Thursday’s session with gasoline prices giving back Wednesday’s gains, while diesel prices stretch their rally to a 3rd day and touched a 2 month high in the process overnight. Oil prices are also seeing modest selling after reaching a 3 week high Wednesday, suggesting that traders aren’t ready to break out of the range bound pattern just yet.

Reports that Russia, the world’s 2nd largest diesel exporter, may soon be prohibiting diesel exports (gasoline has already been restricted for some time) due to the damage done by Ukrainian drones is getting credit for the relative strength in diesel markets, even as U.S. fundamentals suggest there’s an inventory overhang in several regions. The technical number to watch this week is just above $2.40 which was an old support layer from July that became new resistance in September and has repelled the last 2 rally attempts. If that resistance holds, then ULSD is likely to re-join RBOB and WTI in the sideways pattern, but if it breaks, it looks like there’s a run towards $2.50 coming near term.

Too much gasoline in the Mid-con? PADD 2 gasoline inventories increased for a 3rd straight week, moving from the bottom end of their seasonal range to the top during that stretch. That excess supply is putting Group 3 differentials under heavy selling pressure in September. Conventional UNL (CBOB) differentials in the region have dropped to a 20 cent discount to futures this week, and a 14 cent discount to their spot market neighbors in the Gulf Coast and Chicago regions. While it’s not unusual to see big discounts in the group market, they usually don’t come until the winter time, and this phenomenon will start the annual pilgrimage north by long haul truckers to take advantage of the north to south arbitrage window opening early.

Perhaps most concerning to producers in the area is that not only is the discounting starting early this year, it’s happening while 2 of the region’s largest refineries (BP Whiting and Flint Hills Pine Bend) are both undergoing planned seasonal maintenance. Given that Western Canadian crude prices are holding some $12-$13 below WTI prices, mid-continent refiners will still have incentive to run their plants at high levels despite the challenges of moving their excess gasoline from a land-locked markets. That excess production is carrying over into the diesel markets as well, albeit to a lesser extent, with prompt X-grade in the group going for a 10 cent discount to October futures, at a time of year when demand is normally approaching its seasonal peak due to harvest activity.

Tropical Storm Humberto formed Wednesday, but neither it nor Hurricane Gabrielle are going to directly threaten the U.S. coast. The storm to watch is still known as AL94 this morning and is expected to become Imelda in the next few days. The European Model has the storm making landfall between Charleston and Myrle Beach Monday night, while the U.S. model suggests a direct hit on Charleston early Tuesday morning. Neither model predicts this storm to be a major hurricane at this time, but given the warm water ahead of it, and pattern of rapid intensification recently, that certainly could change in the next couple of days, and either way, heavy rains are expected across the Carolinas and Virginia which will bring flooding risks. This won’t be a supply concern, but it certainly will impact demand across the region in the next week.

Meanwhile, non-tropical weather continues to create upsets along refinery row on the Gulf Coast. Total reported an upset at an unnamed unit at its 238mb/day Pt Arthur TX refinery caused by heavy rains. The report suggests the unit was brought back online in just over an hour so it should not have much of an impact.

Exxon’s 588mb/day Baytown TX refinery meanwhile reported a 2nd upset in 3 days, reporting multiple units tripped offline Tuesday morning, and weren’t brought back online until this morning. The 3 units affected are all focused on distillate production.

Notes from the DOE’s weekly status report. Charts attached.

Crude drew about 600k barrels despite import/export flows suggesting a large build. Last week’s chart-topping exports fell but are still high seasonally. Refinery runs were steady in total but changed significantly by PADD. PADDs 1 and 2 bounced back to the high end of their ranges while PADD 5 recovered from the drops over the past two weeks. PADDs 3 & 4 fell but both still sit at or near seasonal highs, leaving the total utilization rate tracking above its 5-year range.

Diesel inventories slid with exports surging to a new seasonal high on the largest week to week increase in at least the past 15 years. PADD 1 stocks fell to hold close to the lower end of the range, PADD 5 traditional diesel increased to an annual high, PADD 3 is just shy of 1mm barrels below average, and the other two PADDs are hovering right around average levels. Total U.S. diesel stocks remain well below the 5-year average but have climbed back to year ago levels after spending most of this year under the previous two.

Gas stocks drew just over 1mm barrels on another uptick in demand and most of that decrease came from the net of PADDs 2 & 3. PADD 2 kicked up to a fresh 5-year high during a period where inventories are typically in decline. That increase partially offset the larger drop out of PADD 3 where stocks have fallen to a 5-year low. The rest of the PADDs were little changed, holding total U.S. gasoline inventories about 3mm barrels below the 5-year average.

Ethanol stocks flirted with their 5-year average about a month ago but never dipped quite that low and have yet to touch that level all year. Last week inventories jumped back to the top of the chart despite drops in production; however, output continues to pace ahead of the past 5 years even with two consecutive weeks of declines.