More Than Half Of Tuesdays Gains Wiped Out As Energy Futures Trend Lower

Diesel futures are trying to lead the energy complex lower for a 2nd straight day Thursday and have so far wiped out more than half of Tuesday’s big gains. ULSD prices are down nearly a nickel just before 8am central, while WTI is down around 80 cents/barrel and RBOB futures are hovering near breakeven.

The early action of weak ULSD and neutral RBOB appears to be influenced by yesterday’s API inventory estimates that showed a large build in diesel stocks of more than 3.6 million barrels, while gasoline stocks dropped by 4.5 million barrels in the run up to Labor Day. The EIA’s weekly report is due out at noon eastern time due to the holiday delay.

OPEC and Friends are meeting this weekend, and the rumor-mill is already swirling despite delegates saying there is not set agenda for this meeting, giving headline writers an easy target to point to regardless of which way the market moves this week.

While refined products have pulled back after Tuesday’s price surge, ethanol prices continue to rally and have hit a 14 month high this week. Recent trade deals have increased ethanol exports from the U.S. which seems to have helped pull prices out of the doldrums, and then yesterday California’s regulators approved E15 blends, opening the doors to the 2nd largest gasoline consumer in the country, which was also the last state to allow the higher blends. Lawmakers in the state continue to grapple with an unfortunate reality that their policies have driven refiners to the brink of extinction within the state, and this latest move won’t win them any points with the remaining facilities as they’re theoretically lowering the demand for gasoline in the state once again. The big question now will be how quickly the industry moves to adopt the higher blends, as we’ve seen reluctance in most other U.S. markets outside of the corn belt to adopt E15.

Of course, it’s not just California where E15 has been a controversial topic for refiners, as midwestern operators are still reeling from this year’s head-fake on E15 blending requirements that caused multiple facilities to waste tens of millions of dollars on upgrades that were ultimately unnecessary.

LA’s remaining refineries have faced multiple upsets in recent weeks, with the AQMD reporting flaring at both PBF Torrance and Chevron El Segundo which appears to be due to unplanned upsets, all while Phillips 66 begins the permanent shutdown of its Wilmington plant this week. It’s worth noting that Phillips 66 split off from Conoco Phillips in 2012, so yesterday’s announcement that ConocoPhillips would be laying off up to 25% of its workforce had nothing to do with the shutdown of the P66 plant.

Basis values in the region remain elevated and the end of the summer RVP season has led to dramatic spikes in basis values previously, so the stage is set for more big price swings, unless of course Korean and Indian refiners have used the past 6 months to plan on ramping up their imports into the state and recent tariff announcements don’t make those shipments cost prohibitive. Speaking of tariffs, the White House is making its case in front of the Supreme Court this week, and their decision will determine whether or not most of the reciprocal tariffs announced this year are allowed to stay.

The NHC continues to track a storm system churning across the Atlantic and now gives an 80% chance of that system being named in the next week, up from 70% yesterday. The bad news is that the potential development area has shifted south, which increases the odds that it could impact the U.S. in another 7-10 days, although long range models still can’t predict a path until the system develops more. Regardless of where this latest storm goes, AccuWeather forecasters are warning that the Gulf and Caribbean are flashing warning signals that are likely to bring more storm activity in the back half of the month, and any system that makes its way into those warm waters is expected to become a major hurricane.