November ULSD Has Taken Back Its Place As The Leader Of The Energy Rally

Someone continues to think it’s a good idea to try and sell refined products in the overnight sessions, even though we’ve seen strong rallies wipe out those losses every day this week.  November ULSD has taken back its place as the leader of the energy rally, setting a new 4 month high for futures, and pushing the spread vs the December contract north of 50 cents/gallon this morning. RBOB is seeing a similar push higher, threatening to break the $3 mark and pushing it’s prompt/2nd month spread north of 33 cents/gallon this morning.   Those big moves in time spreads continue to wreak havoc on basis markets across the country as cash market traders deal with huge basis swings that are often doing nothing more than sliding down the steep backwardation curve.  

Two examples of this phenomenon from Wednesday: Group 3 ULSD dropped sharply and traded 40 cents below November ULSD, but still commanded a premium to the rallying USGC contract that’s trading at a 5 cent premium to December.  In LA we saw CARBOB basis values climb more than 40 cents on the day, but cash values still declined by a nickel for the day as that market rolled to a December reference month.

The best cure for high prices is high prices: Note the spike in West Coast (PADD 5) imports in the charts below from the DOE’s weekly report. That shows how the cargo market reacted to the big price premiums we saw in late September, and those barrels hitting the market then contributed to those prices crashing. Now that we’re seeing NY Harbor prices commanding the huge premiums in October, we should see imports into PADD 1 increase in the next few weeks although the Atlantic basin doesn’t seem to have the spare fuel the Pacific does owing to the chaos in Europe and refinery closures after a decade of Europe and the US East Coast having too much refining capacity.

PADD 1 refinery runs have ticked up to the 2nd highest weekly level since the PES refinery exploded and closed in 2019 as plants return from their fall maintenance and the facilities that had been limping along just trying to survive for the past few years are now finding themselves in the right place at the right time. Right on cue, PBF’s Q3 earnings showed the company made more than $1 billion during the quarter, nearly 18 times more than they made this time a year ago.  

On the other hand, not everything is rosy in refinery land as the largest remaining PADD 1 refiner has reportedly gone through a restructuring and laid off numerous employees across the country. We just witnessed strikes at refineries in France that shut down 4 facilities and contributed to the tight supplies in the US East Coast this month, as workers protested the companies making record earnings while the employees weren’t sharing in that success, and it wouldn’t be surprising if we saw similar reactions at some US facilities following this type of action.

Speaking of Atlantic basin refinery capacity, one detail of the upcoming European sanctions on Russian energy exports is an Italian refinery that could be forced to close due to its links to Russian-owned Lukoil, which would cut the country’s production capacity by 20%.  Germany recently took control of 3 refineries to avoid a similar problem, although it’s still unclear how those facilities will be supplied once the bans start in December.

That uncertainty of oil supply, along with the ongoing release of 1 million barrels/day from the SPR helped push US crude oil exports reached an all-time high last week with more than 5.1 million barrels (214 million gallons) of crude being sent abroad every day.  If that statement makes you want to jump on the export ban bandwagon, take a look at the chart of exports over the past 15 years, and compare oil prices today to the 2008–2013-time frame when crude oil exports were mostly illegal, and prices were still regularly north of $100/barrel. 

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.