Refined Products Are Trading Within ½ Cent Of Where They Were This Time Yesterday

Let’s try that again: refined products are trading within ½ cent of where they were this time yesterday, but – as they often do - have taken a roundabout way to go nowhere.  At least some of the choppy action can be blamed on a rollercoaster in US equity markets on Monday, and while some of the back and forth looks like a market that’s going to consolidate and move sideways after a solid 2 week rally. 

Besides technical indicators moving into a more neutral stance, fundamentals are looking less bullish now that they did just a few days ago. Oil production in both Libya and Kazakhstan appears to be coming back online this week, which takes away one of the arguments for the bulls to keep oil prices in the $80 range.  So far the record setting pace of Omicron cases in the US is being taken in stride, even as it clearly starts to impact activity, which seems primarily due to the expectations that this variant will run its course relatively quickly, and not impact demand for very long.  

The FED is once again taking center stage in the financial markets this week as yet another governor steps down for the perception of insider trading on the FOMC data, and the chair prepares to testify in front of congress as the markets are starting to behave like there will be 4 interest rate hikes this year.

Unlike the see saw action in products, RINs are continuing to march slowly but steadily higher this week, with D6 ethanol values approaching the $1.30 level for the first time in nearly 3 months.  Ethanol spot prices meanwhile are trading roughly 80 cents lower than they left off in 2021. Why the disconnect between the two?  As the forward curve chart shows, forward ethanol prices are actually higher today than they were trading a month ago, but the extreme backwardation we saw in November and December finally evaporated after the holidays. 

A Reuters article this morning highlights the big changes on the table for the RFS this year as the original law included a clause requiring a reset in 2022. 17 years after the RFS first came into law, the program mandates roughly 21 billion gallons of biofuels to be blended in the US annually, vs a program target of 36 billion gallons, mainly because the cellulosic ethanol so many were relying on to make the RFS a reality nearly 20 years ago still doesn’t exist commercially. A shift away from traditional ethanol – which several studies suggest can be worse environmentally than gasoline – and potentially adding electricity to the RFS are two major changes some think could be announced this year.

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