ULSD Futures Carry Momentum From 15 Cent Bounce

Diesel prices staged an impressive reversal Tuesday, bouncing more than 15 cents off of chart support, and that upward momentum carried through the overnight session to push prices to a fresh 6 month high. Gasoline and Oil prices staged similar but less dramatic recovery rallies and continue to follow diesel’s pull higher this morning with charts suggesting there’s room to continue pushing higher.

While equities also bounced noticeably off their lows Tuesday, the timing and size of the move in energy contracts suggests there was more to the rally than just following stock markets. Given the bandwagon jumping we’ve seen from money managers in energy contracts over the past several weeks it seems plausible that once support held, new funds were encouraged to join the party and bet that 6-month highs are still a good time to buy.

The API reported an increase in crude oil inventories of 4 million barrels last week (unless you believe the other headlines that say they dropped by 4 million barrels), following the huge draws the week prior. Diesel inventories were reported to drop by 2 million barrels, while Gasoline inventories were estimated to draw slightly around 410,000 barrels. The DOE’s weekly report is due out at its normal time, and after a huge swing in the adjustment factor drove the largest decline on record for crude oil last week, the market seems fully prepared to shrug off the headline oil inventory values as they did last Wednesday. Refinery runs will be a number to watch this week to see the actual impact of the heat wave and the numerous refinery hiccups that have come with it. PADD 2 gasoline stocks are also worth a watch as we’ve seen basis values in both the Group 3 and Chicago markets rally sharply in the past week, foreshadowing tight supplies ahead of the fall RVP transition.

California’s LCFS credit values have been rallying for the past few days following an announcement of another workshop on August 16 to discuss changing the program’s standards to (presumably) lower pollution targets similar to what we saw with the Cap & Trade program in July that sent CCA values soaring to record highs. That bump in LCFS values is welcome news for the rapidly expanding Renewable Diesel production crown that are dependent on those credits to turn a profit. Washington and Oregon’s programs meanwhile continue to come under fire for driving fuel prices in those states to California levels. 

For real this time? Mexico’s president kicked the can down the road again on the start date for Pemex’s new Dos Bocas refinery. The facility is already roughly 3X over budget and years behind schedule, and after a grand opening that promised fuel production no later than July, the most recent target has been moved to November. Coincidentally, November is also the new estimate for the first production from the Dangote refinery in Nigeria, which like Dos Bocas may either have a large impact on Atlantic basin product markets or remain a pipe dream depending on what’s actually happening behind the refinery gates. 

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