Diesel Prices Rally on Technicals, Tight Inventories

We’re seeing another reversal Thursday with ULSD prices rallying 6 cents in the early going after dropping more than 20 cents in the past week. The bounce seems to be driven more by technicals than fundamentals after prices held support just north of the $3 mark Wednesday, although tight inventories could also be playing a role. WTI is also seeing a bounce after its biggest weekly sell off in 4-months and is currently holding just above the $80 mark while gasoline prices are struggling to keep pace so far.    

US oil output ticked up to 12.7 million barrels/day last week, reaching the highest mark since the start of the pandemic forced a rapid shutdown of many wells, and keeping the country on pace to set a record for annual production this year. The increasing output despite the consistent drop in drilling rigs is yet another testament to the ingenuity of the industry to continue leading through technological advancement, despite many concerns that legacy well rates are due to drop off. This increase in output is also a result of the shift to more off-shore drilling (which has higher output per well than on-shore fracking) over the past 2 years as the world has come to the realization that oil demand isn’t going away for a very long time.

Gasoline inventories remain well below average across the country, with all 5 PADDs holding below their 5-year seasonal average. The East and West Coasts (PADDs 1 & 5) are both hovering at the bottom of their 5-year range leaving them in a precarious position until we get past the fall RVP transition.  

The Midwest (PADD 2) remains the only region in the country with diesel inventories that are at or above average for this time of year, while all others are running near the low end of their 5-year range. West Coast diesel inventories (and by extension the total US diesel demand estimate) are showing an artificially low number since the DOE’s survey still does not have a place to report weekly stats on renewable diesel. 

Refiners seem to be doing everything they can to keep up with the low domestic inventories and steady export demand, with throughput rates remaining above average despite the drop in capacity over the past few years. We are seeing numerous small disruptions keeping several plants from reaching max output, and the concern is that we could soon see more disruptions with several fall turnarounds and the peak of hurricane season just a few weeks away.  

California doesn’t get hit by hurricanes and has only had 3 tropical storms make landfall in recorded history, but we might get a 4th early next week. Hurricane Hilary formed off the Mexican coast yesterday and is expected to rapidly intensify into a category 4 storm by Friday, before losing steam rapidly as it approaches land.   Yesterday the forecast path had the storm making landfall as a tropical storm near LA. This morning the center of the forecast cone has landfall happening in Mexico. Wherever it hits, the system is expected to bring heavy rains to California, Arizona and Nevada and we can’t yet rule out more disruptions to LA-area refineries. In other words, Hilary is scaring lots of people but looks like she’ll fall apart rapidly just in the nick to time to prevent too much damage from being done to our country.  Sounds familiar.

In the Atlantic basin all 3 systems being tracked by the NHC have improving odds of development today. The two storms over the open Atlantic are both given 60% odds of being named this week, but both look like they should be moving north just enough to prevent a threat to the US, while the system in the Gulf of Mexico is given 30% odds of becoming a named storm next week. 

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