OPEC Production Cut Slashes Refining Margins

OPEC’s million barrel production cut announcement continues to ripple through energy markets, although ongoing concerns about a weakening economy seem to be keeping buyers in check. Monday’s big jump in oil prices was bad news for refiners, as refined products weren’t able to keep pace with oil and crack spreads dropped by about $2/barrel as a result.  

Cracks are now at the low end of their range for the past year but remain well above levels we saw for 2 years prior and still way above where we’d expect to start seeing run cuts for economic reasons.

The problem technically with the big jump in WTI is that it left a significant gap in the charts between $76 and $79 that some traders (or more likely their algorithms) will be programmed to fill, but whether that comes before another big rally attempt, or after that rally runs its course is impossible to know. If WTI can break and hold above the 2023 highs around $82, there’s a good chance we’ll see a run at $90, although the 200-day moving average should offer some resistance around $85.

RBOB is looking similar to WTI, with a small gap left in its chart by the April contract expiration and the big rally to start the new month. We may see RBOB fill that gap this morning however (it’s just 2 cents away at the moment) which would then reopen the door for the seasonal rally into the “driving season” headlines that could easily push prices north of $3 soon.

ULSD continues to look the weakest on the charts after spending most of last year as the strongest. At this point, even though ULSD prices are 18 cents above their lows for the year set 3 weeks ago, they’ll need to rally another 15-20 cents just to break out of their slump and avoid another big move lower. While this winter was unusually unkind to diesel prices, there are some signals that supplies could soon tighten up, and prices could rally again, particularly if WTI and RBOB lead the way.

French refinery strikes continue to be largely ignored by refined product markets thanks to soft demand and a jump in imports from the Middle East (thanks to Russian barrels finding new homes).   An Argus note published Monday suggests that this could soon come to an end however as inventory stockpiled ahead of the Russian diesel embargo are rapidly depleting and will soon bring more buyers back to the Atlantic basin. 

Markets across the US Southwest remain very tight, with diesel prices pushing close to $1/gallon over spot markets in a few spots, while Phoenix’s AZRBOB is going for nearly $1.30 above LA spots. 

The Dallas FED’s banking conditions survey offered a snapshot into how the fallout of banking failures is impacting a market that already had plenty of negative data points, as lending slowed for a 5th straight month, and the outlook for future lending continued to deteriorate.

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