Diesel Prices Are Trying To Lead The Energy Complex Higher This Morning
Diesel prices are trying to lead the energy complex higher this morning, having rallied 35 cents in the past 3 days. Gasoline and oil prices seem to be unwilling participants in diesel’s attempted rally however, following stock markets back into the red after a big rally Wednesday.
Besides the sabotage of the Nord Stream pipelines, refinery closures from maintenance and strikes across Europe are also adding a bullish factor for distillate prices this week. It’s worth noting that the COVID impact on refineries is still coming into play, as facilities that put off projects 2 years ago when they were struggling to survive now have no choice but to catch back up in order to keep those facilities operating.
Speaking of delayed maintenance: Valero is reportedly delaying maintenance at its Memphis TN refinery to (presumably) have more supply to send north on its river system that supplies much of the Ohio river valley during a period of unusually tight supply caused by other refinery outages. Meanwhile, most workers at the Husky refinery in Toledo were laid off this week, in another sign that that facility won’t be coming back online anytime soon after the deadly fire last week. Note the big drop in PADD 2 refinery runs, and the low PADD 2 inventory levels to see why suppliers are continuing to scramble in that market.
Speaking of which, gasoline prices in California are now higher than they were during the summer peak, as futures rallied and basis values held at the record-setting $2.45/gallon premium to RBOB Wednesday. Take a look at the PADD 5 inventories which touched a fresh 10-year low last week.
While gasoline supplies are extremely tight, renewable energy supplies must be building rapidly as the LCFS credits that were the big reward for producers who can bring those products to California have plunged to a fresh 8 year low below $70/credit this week. Those credits are now worth less than half of what they were at the start of the year, and will provide a disappointing return to so many who raced to ramp up production (in several cases by shutting down their crude oil refineries) over the past 3 years.
Renewable diesel has led the surge in production, but that product is not yet tracked on a weekly basis like traditional diesel or even ethanol is, so it’s hard to say where actual inventories are. On the other hand, it’s clear that traditional diesel stocks are pretty low as they have rallied sharply this week, with prompt values trading near a 50 cent premium to futures, and creating another scary forward curve for shippers still trying to recover from the backwardation extremes seen earlier in the year.
Hurricane Ian continues to batter Florida after making landfall as a category 4 storm yesterday. Damage assessments around the port of Tampa should start today, and the early indications from the Ft. Lauderdale area are that those facilities escaped major damage which will aid resupply as the storm passes. The revised path takes the storm further out to sea east of Jacksonville, which “should” keep those terminals from staying out of operation for long, and there’s a chance that this huge storm may have just threaded the needle crossing the entire state without making a direct hit on any of the major fuel ports. There’s another tropical depression that could get named in the next couple of days, but the projected path keeps it far out to sea and not a risk to land.
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The Recovery Rally In Energy Markets Continues For A 3rd Day
The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.
Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.
Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.
Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.
The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.
So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.
The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.
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Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday
Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.
RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.
The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.
PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.
Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.
Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.
Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.
California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.