Production Doubts Overshadow Recession Concerns as Refined Products' Rally Continues

After a 1 day break, energy prices resumed their rally Thursday, with strong gains that have continued on into Friday’s trading.  For the moment, it appears that a variety of refinery concerns are outweighing the recession fears that had cropped up mid-week.   From a chart perspective, this quick recovery puts both gasoline and diesel in a position to see more strong gains in the weeks ahead. 

The nationwide protest in France over a change to increase the retirement age from 62 to 64 before workers are eligible for their state pension was estimated to surpass 1.1 million people Thursday, and halted fuel deliveries from at least 3 refineries.  While the price reaction was delayed somewhat, it does seem like it was a key contributor to the strong rally that pulled both RBOB and ULSD futures to new highs for January, and opening the door to another 20-30 cents of upside on the charts.

If all you do is look at where US fuel inventories are to start the year in the charts from the DOE’s weekly report below, it’s easy to understand why prices have been rallying for 9 out of the past 10 days, as most regions have far less supply of gasoline and diesel than they normally do to start a year.  While demand remains average at best, it is improving quickly as we move out of the worst 2 weeks of the year, and refinery runs are still far below normal due to the numerous weather-related disruptions over the past month. 

If you’re looking for a silver lining in the low refinery output figures, it may be that it’s allowing crude oil inventories to recover, even though the SPR releases have come to an end.  Then again, you can’t put crude oil in your vehicles, so that’s not particularly helpful for consumers.  Exports remain at above-average levels for refined products and crude oil, as facilities on the Gulf & East Coasts have no shortage of buyers in the Atlantic basin, while producers on the West Coast are being incentivized to send barrels overseas to avoid the spreading environmental taxes on their products.

Caveat Emptor:  The new owners of the beleaguered refinery FKA Hovensa may be wanting a do-over after a judge ruled they must stand as co-defendants in environmental claims for the variety of toxic mishaps that occurred on the prior owner’s watch.  If there weren’t already enough nails in that facilities coffin to keep it from having a meaningful impact on Atlantic basin refinery capacity, add this as one more. 

Motiva, AKA Aramco, reported an upset on an FCC unit at its refinery Thursday.  While it’s unclear if that unit or others were forced to reduce rates because of that upset, the timing of the report also coincided with the building momentum in refined product prices.  

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