ULSD Prices Drop Despite Looming Russian Supply Ban

March trading is going out like a lamb as energy prices continue to search for direction with Bears focused on soft demand and fears of a recession, while the Bulls can see supply shortages and the risk of disruption lurking around the corner. 

While March felt chaotic with a new banking crisis and plenty of other domestic and geopolitical controversy going on around us, it was actually a relatively tame month for refined product futures. The trading range for diesel in March was actually the smallest we’ve seen since before the war broke out and was just ¼ of the range we saw in March a year ago. 

Protesters in France agreed to extend refinery strikes through April 4th, which is keeping close to 1 million barrels/day of refining capacity offline.  A Business Wire note this morning highlighted how these strikes may be rapidly depleting the stockpiles built up ahead of February’s sanctions that banned Russian diesel imports.   

The Dallas FED confirmed what we’ve been seeing in the weekly rig counts, showing that activity in the energy sector has stalled out in the first quarter of 2023. Executives surveyed lowered their Crude oil price outlook for the end of the year by $4/barrel from the previous survey but made a much larger change to expectations on Natural Gas prices, slashing those estimates by nearly 40% since Q4.

As if banks don’t have enough on their plate these days: There were reports this week that Wells Fargo is looking to expand its energy trading business. There are also reports that Wells Fargo was fined nearly $100 million for sanctions violations, is under investigation by the CFTC for illegal trading communications, and that a former executive is facing jail time for obstructing the investigation that ended up with the bank paying more than $3 billion in fines for opening fake accounts.  

You may also remember that after the last round of bank bailouts in 2008, the FED moved to make the banks act like banks and not trading houses, which eventually led Morgan Stanley to try and sell their oil trading business to the Russians, only to end up selling it to a firm headed up by a former Enron trader when the Russian deal was nixed by regulators.  You can’t make this stuff up.

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Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.

US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.

The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.

Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.  

Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.

Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.  

It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.

Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure. 

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Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning. 

Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning. 

While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time. 

French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.

Click here to download a PDF of today's TACenergy Market Talk.