Diesel Bulls: A Major Cold Front is About To Sweep Across The Country, Which Will Certainly Stir Up Some Heating Demand

Energy futures were jumping again overnight after US fighter jets hit Iranian-tied military targets in Syria, and the deal to lift sanctions in Venezuela already looks like it might be falling apart.

While the bulls have the early momentum, this latest in a series of rallies tied to fears of supply disruptions seems to be lacking the enthusiasm of earlier versions, and we’ll need to see another 8-10 cents of gains from refined products to break the downward trend on the weekly charts. 

What a difference a week makes: If you needed ULSD in the Group 3 market last Friday, you needed to pay $1.05-$1.15/gallon premium over the November Futures contract to hit an offer. Today, those same barrels are being offered for a $.01 discount. While much less dramatic, we have seen steady selling in most other regional basis markets as well as physical traders are having to offer lower differentials to overcome the backwardation in futures. One hope for the diesel bulls: A major cold front is about to sweep across the country with 30-40 degree temperature drops forecast, which will certainly stir up some heating demand.

We continue so see stronger values for space on Colonial pipeline as Gulf Coast refiners seem to be having a hard time moving their excess supply. Both Line 1 and 2 values reached their highest levels of the year this week, as lower basis values for both gasoline and diesel along the Gulf Coast opens up the arbitrage window to ship barrels to New York. It’s not uncommon to see stronger line space values throughout the winter months as the weak demand season puts downward pressure on Gulf Coast values. This year the added element of major turnarounds at 2 East Coast refineries is likely contributing to the early strength as well.

Ethanol prices were already coming under pressure this week following weakness in the corn market, and that selling accelerated after the DOE’s weekly report showed a jump in ethanol inventory and production. Values are once again hovering near 2-year lows as we head into what are traditionally the weaker months for demand which could put more downside pressure on alcohol prices.

Q3 earnings releases have been a mixed bag so far, with a general theme of healthy profits that are a far cry from last year’s record setting figures.  

Valero beat estimates as its refineries ran at 95% of capacity for the quarter and were able to capitalize on downtime at other facilities. The company’s renewable diesel operations saw nearly a 25% increase in volume from year ago levels, but profits were nearly cut in half as the drop in RIN and LCFS credits took a bite out of earnings. On the flip side, their ethanol earnings surged to nearly $200 million in the quarter from break even a year ago.  

P66 also had a strong showing with $1.7 of the total $2.1 billion in earnings from the quarter coming from its refining operations, although those results were below many wall street estimates. 

Exxon noted $2.4 billion in refining-related earnings for the quarter, up substantially from Q2 as its new Beaumont units helped the company hit record throughput rates along with strengthening crack spreads. An interesting bullet point in the Exxon earnings release was a negative mark-to-market impact on its trading operations, which will raise questions as the company’s relatively new strategy to leverage its trading expertise appears to be disappointing so far. 

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