Mixed Market With Gas Losing Ground And Diesel Rallying

It’s a mixed bag to start Friday’s trading after a huge 2-day rally that pushed several contracts to their best weekly gain in 4 months.

Reports that both India and China, who buy nearly 85% of Russia’s oil exports, would be cutting back on those purchases following the latest round of sanctions is the major story stirring the markets, with many more questions than answers available on how this may re-shuffle global supplies that had settled in to a period of relative calm after making a tidal shift 3 years ago in the direction of oil flows globally.

The good news for consumers is that several sources have noted a global glut of oil supplies, particularly waterborne barrels, in recent months. The IEA and others have noted that oil inventories on ships have recently reached levels not seen since the depths of the COVID lockdowns, suggesting that this latest disruption in shipments won’t correspond to fuel shortages in most markets anytime soon.

ULSD futures rallied 29 cents from last Friday’s low of $2.1174, marking the best weekly performance since the 12 day war in Iran back in June. At this point, it looks like just the September high at $2.4453 is standing in the way of a test of $2.50.

Line Space values on Colonial’s main gasoline line spiked to a 15 month high Wednesday as Gulf Coast gasoline basis values came under heavy selling pressure, widening the arb window to ship barrels north.

Back from the dead? The recent recovery in various credit prices, and lower feedstock values particularly with Soybean farmers needing a new home to replace exports to China, seem to be encouraging several biofuel producers to ramp up operations after a brutal year that saw numerous facilities cut back or close down. Perhaps most notable is the recent restart of the Come By Chance refinery in Newfoundland CA that has resumed shipments into California after shuttering the facility earlier in the year. The local government gave the facility a loan recently to try and encourage a re-start of those operations even as the company plead guilty to safety violations that caused a deadly fire at the plant in 2022. Meanwhile, the fund that owns Braya was recently nominated for a Private Equity Firm of the year by D Magazine, which will have to be a consolation prize to the pending reduction in RINs for imported fuels that will likely force Braya to keep its production in Canada or perhaps Europe if it manages to continue operating.

For domestic producers, the recent rally in RINs, LCFS and CCA values brings the total subsidy package available for sales in California to the $3/gallon mark, which is the renewable fuel equivalent to the Mendoza line in baseball. The story is very different for importers that don’t qualify for any 45Z credit and will soon have their RIN generation cut in half (pending the finalization of the EPA’s proposal for 2026) and foreign feedstocks are not exempt from tariffs which will put them at a disadvantage of around $1/gallon.

Even though some producers are able to break even again, Valero’s Q3 earnings report showed that the loss of the $1/gallon blenders tax credit is still painful for the industry as its Renewable Diesel segment lost another $28 million for the quarter. The losses in renewables and a $50 million loss on its West Coast refining operations were two negatives in an otherwise great quarter for the company that saw its traditional refining earnings surge by more than 200% from a year ago thanks in large part to its 40% distillate output that’s benefitted from very strong diesel cracks. The company said during its earnings call that it was continuing with plans to shutter its 170mb/day Benecia CA refinery next year as talks with California officials weren’t fruitful enough to offset the consistent losses at that facility.

Tropical Storm Melissa is expected to be a major hurricane by Monday with deadly impacts to Jamaica, Cuba and Haiti expected, but forecast models suggest it will stay offshore and not hit the US as it moves north in the back half of next week.