Energy Futures Are Seeing A Big Pullback To Start Thanksgiving Eve Trading

Energy futures are seeing a big pullback to start Thanksgiving eve trading, wiping out most of Tuesday’s gains. As traders continue to deal with a daily deluge of dreadful demand headlines from China, offset by uncertainty surrounding supply thanks to OPEC rumors and a plan to cap Russian oil prices that leaves more questions than answers. 

More refinery problems seem to have contributed to runup in RBOB futures in the early part of the week, although this morning’s pullback suggests the market really isn’t too worried about gasoline supply. Reports that the Irving refinery on the East Coast of Canada was facing challenges restarting after a major fall turnaround and that BP’s plant in Rotterdam was unable to restart due to a strike are both making waves in futures and physical markets, and could be key factors driving trading as we approach the end of November. Meanwhile, Bulgaria announced that it will exempt its refinery owned by Russia’s Lukoil to continue exporting fuels after the EU embargo starts next month, adding yet another loophole to the attempted sanctions on Russian supplies.

Cash markets around most of the US weren’t buying the futures rally Tuesday, with basis values tumbling for both gasoline and diesel. On the West Coast, gasoline basis values have dropped to their lowest levels in 2 years with discounts ranging from 25-30 cents/gallon, just two weeks after trading at a $1/gallon premium to December RBOB futures. New York harbor diesel has completed its return to earth, trading at just a penny premium to December ULSD futures, just two weeks after reaching an all-time high of $1.25/gallon. Gulf Coast distillates continue to get hammered, trading at a 36 cent discount to Dec ULSD, as refiners continue to struggle to find enough transportation to move their product.

An often-overlooked detail in the breathless reporting of diesel shortages is that the US actually produces more than a million barrels/day more diesel than it consumes, with producers relying heavily on the export market to keep their facilities moving at maximum capacity. What seems to be happening lately is that the refinery hubs have plenty of supply as run rates have been maxed out, but pipeline and vessel availability is lacking, forcing huge discounts for generic origin barrels, and big premiums for anyone who has space along the pipelines heading East and West, or a ship that’s not already booked up. A prime example: With New York ULSD now trading close to par with futures, you might think that the price for space along Colonial would collapse, but it’s holding north of 15 cents as Gulf Coast refiners are paying up to find a home for the diesel they want so badly to continue overproducing given current margins. 

The API reported that diesel stocks increased by 1.1 million barrels last week, while gasoline stocks declined by 400,000 barrels. Crude oil stocks declined by more than 4 million barrels, even though the SPR released more than a million barrels on the week, which has helped make that brief contango in WTI prices disappear.  The DOE’s weekly report is due out at its normal time today, with the import/export flows key numbers to watch.

Futures will trade in abbreviated sessions Thursday and Friday but spot markets will not be assessed. Even though many would prefer if nothing happened for the next 4 days, rack prices can and will change over the long holiday weekend, especially if we see a big market move like we did last year. 

RIN values continue to slowly but steadily climb to an 18 month high as the market awaits the EPA’s big announcement on its new plans for the RFS next week. 

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