The Downward Sloping Weekly Trend Lines Are Still Intact And Suggest There Could Still Be More Substantial Downside Ahead

ULSD is trying to lead the energy complex higher this morning, with December futures up a nickel in the early going but are once again finding RBOB and crude oil to be reluctant participants in the rally. Yesterday we saw RBOB and WTI give back healthy early gains and end lower for the day, and this morning they’re lagging far behind the gains in ULSD. The downward sloping weekly trend lines are still intact and suggest there could still be more substantial downside ahead.

Both HF Sinclair and PBF continued the theme of strong earnings, just not as strong as last year, in their 3rd quarter updates. PBF touted that its new SBR renewables unit was profitable in its first full quarter of operations (although it didn’t say how profitable) while HF Sinclair’s renewable segment clawed back above break even this quarter, vs a loss of $49 million a year ago. Both PBF and HFS highlighted the difference in refining operations by region, with Gulf Coast and Mid-Continent operations costing around $5-$6/barrel (10-12 cents/gallon) compared to $10-$12/barrel (24-28 cents /gallon) break even for their West Coast operations.  That’s a big difference, but it’s still much lower than the 55 cent/gallon break even on the renewables segment, which shows the challenge the lower production rates of a renewable facility create.

Meanwhile, the reason for Lyondell’s slow rolling of the Houston Refining sale/shutdown decision became clear this week when the company confirmed that the facility would be part of the DOE’s new Gulf Coast hydrogen hub project. Oil refiners are a natural choice for those projects as they are already set up to take in large amounts of natural gas, and already have hydrogen production units that currently aid in stripping Sulphur out of their products. 

While there’s no mistaking that Q3 was solid for US refiners, the 4th quarter is looking much more challenging 1/3 of the way through. Gasoline margins in particular are dragging down earnings, and while diesel margins are still enough on their own to keep facilities operating in the black, there’s reason to believe this could be a tough winter unless it’s a tough winter for weather to give diesel prices an extra boost. 

Yesterday’s DOE report shows that gasoline demand continues to be sluggish, allowing inventories to keep climbing despite being in the midst of a busy turnaround season. As refiners return from maintenance, and we go through the seasonal slowdown for gasoline demand, it’s possible we could be talking about containment issues at some facilities and economic run cuts unless diesel values can hold strong.

Unfortunately for refiners, domestic diesel consumption isn’t looking very solid, with the DOE’s estimate dropping sharply for a 2nd straight week, below the 5-year range, while export activity remains sluggish. Of course, it’s still a challenge to get a real read on demand levels, or PADD 5 inventories, when the DOE’s data still does not include any renewable diesel figures, even though that product now makes up roughly half of all diesel sold in California.

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