Refined Products Are Teetering On The Edge Of A Technical Breakdown To Wrap Up Trading For The First Half Of The Year
Refined products are teetering on the edge of a technical breakdown to wrap up trading for the first half of the year. While two days of heavy selling has the energy complex in a defensive stance, support on the charts has not yet completely given way, meaning it’s still too soon to call a top in prices even though we’ve had a major pullback in the past two weeks.
RBOB prices are trading 62 cents below their June highs this morning, but still need to break and hold below $3.64 before the technical breakdown can be confirmed. Keep in mind that today’s expiration of the July RBOB contract will knock about 10 cents off of prompt values, which adds to the bearish outlook on the charts. IF the trend support and June lows break today, don’t be surprised to see prices make a run at $3 later this summer.
ULSD prices are in a similar spot, trading 64 cents below where they were less than 2 weeks ago, but they’ve rallied more than 6 cents from their overnight low at $3.95, giving the bulls a chance to hang on to the trend that’s pushed prices up from $2 in December. If prices drop and hold below $4, that trend will be officially broken which opens the door to a run at $3.50 in the next few weeks despite the well-documented fundamental issues with distillates.
Yesterday’s long-awaited DOE report, which provided a rare 2 weeks’ worth of data due to system issues seemed to be a catalyst for some of the selling in products, as inventory levels for both gasoline and diesel saw healthy increases in both of the past 2 weeks, while demand estimates slumped well below average levels for this time of year. Those data points also coincide with the latest slide in equity markets as some traders seem to be convinced that high prices may have already started to cure themselves, and the solution to the imbalance in fuel markets will come from a big drop in consumption.
US refiners are running at 95% capacity, but an EIA note suggests that in reality they’re effectively maxed out due to the normal operational constraints on those facilities that are much more complicated to operate than many believe. That report also highlights that US capacity is expected to decline for a third straight year in 2022 with 2 more plants scheduled to be shut down or converted, unless the record high margin environment convinces someone with a few billion dollars to reopen those plants.
Reminder: Today is the last day for July RBN and HON futures contracts, so for those in the NYH and Group 3 markets that haven’t already transitioned to an August price reference will need to watch the RBQ and HOQ contracts for direction today. The backwardation in products is not nearly as extreme as we’ve seen over the past few months, but there will still be a noticeable drop when August futures take the prompt position that will confuse some tomorrow when cash markets don’t follow.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
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