Russian Export Drop and Refinery Strikes Drive Diesel to Four-Month Highs

Refined products are surging this morning, with diesel prices again leading the way, up nearly 8 cents/gallon, while RBOB futures are up about 4 cents despite oil prices trading barely above break even on the day. The December ULSD and RBOB contracts both reached 4 month highs during the overnight rally, shrugging off some more bad news from the labor market, and the potential that Jet fuel demand in the US may take a big hit from the government shutdown. The move seems to be led by a 4% surge in the November Gasoil contract (Europe’s ULSD equivalent) suggesting we’re seeing a miniature version of the 2022 market swings where concerns about where Europe would find its supplies as Russian options became scarce led to huge market swings.

Reports that Russia’s waterborne diesel exports reached a multi-year low in October are certainly contributing to the rally, as the damage done by Ukraine’s US-aided long-range drone campaign continues to slowly become more apparent.

The campaign doesn’t appear to be slowing down either. Ukraine’s drones struck Lukoil’s 300mb/day Volgograd refinery overnight, and a 200mb/day Belarusian refinery had a fire, although it’s not clear if its neighbors played a part in that or not.

While the spike in diesel prices is great news for many US refiners (and even offers relief to some renewable diesel producers who need higher ULSD to compete) as crack spreads approach 2 year highs, the sanctions that are contributing to them may cost Indian refiners $4-$7/barrel as they’re losing at least some of their advantage on buying discounted Russian barrels according to a Quantum commodity report.

Not buying it? While the recent runup in diesel futures has strengthened time and crack spreads, basis differentials in the middle of the country are plummeting and offsetting much of the move in the NYMEX. Group 3 “X Grade” ULSD values dropped to their biggest discount since February on Wednesday, and are now trading below their neighbors on the Gulf Coast, which will begin the winter pattern of north to south movements and put downward pressure on rack markets in north Texas.

Marathon reported the 2nd upset of the week Wednesday at its 630mb/day Texas City (AKA Galveston Bay) refinery. A Hydrotreating unit was reportedly taken offline due to a compressor trip which led to more than 5 hours of flaring.

Notes from the DOE’s weekly status report:

Crude stocks increased with a surge in imports as US production continues at record levels. PADD 3 accounted for most of the bump, although stock levels are still well below seasonal norms. Total US refinery runs held steady but there were some large offsetting changes across the PADDs. PADD 1 dipped but is still holding at the high end of the chart. PADD 5 steadily declines as fall maintenance work continues and operations slow at refineries set to close in the near future, dropping the utilization rate to 73%. PADD 2 reported a healthy 102,000 barrel per day increase but run rates are still well below previous years.

Diesel inventories posted a small decline as significantly lowered exports were cut into by increased demand. PADDs 1 & 2 remain well below historical averages while PADDs 3-5 are all holding above. Monthly renewable diesel stats from August posted last week showing decreases in PADDs 1-3, particularly PADD 3 to drag the total US count down, and increases in PADDs 4 & 5, all of which are well above their 5-year averages.

Gas inventories had an across the board draw less a very small 10,000 barrel increase in PADD 5. Gas stocks typically trend down in the spring and fall but last week’s reading hit a 5-year low. All PADDs except 5 are running below average with 2 & 3 at seasonal 5-year lows. With a big week to week drop in exports and production hitting an all-time high, ethanol stocks are up and continuing to hold above the 5-year seasonal average.