Recovery Rally Continues as Refinery Runs Remain Below Par

The recovery rally continues for energy prices this morning. ULSD futures have rallied 31 cents off of Monday’s low trade, cutting their losses of the prior two weeks by a third, while basis values across much of the country continue to strengthen as well pushing cash prices sharply higher. Gasoline prices are up 21 cents from their Monday lows and look poised to continue to push higher. 

The EIA’s short term energy outlook forecast that US refinery runs will remain below normal levels through April as lingering issues from the Christmas blizzard, and heavier than normal spring maintenance after numerous plants deferred work in 2022 will both limit production. 

The biggest change in the report was a 30% drop in just 1 month for the US natural gas price forecast as the much warmer than expected winter weather has hampered demand. That phenomenon has no doubt played a role in the huge drop in diesel prices over the past couple of weeks as well as heating oil suppliers along the east coast went from very short on supplies in November to having a glut in February.

The EU Ban on waterborne petroleum products may end up being more disruptive to markets than the crude oil import ban that started in December, and actually forecast a higher number for Russian oil production this year than previously expected. Limited clean tanker availability is expected to be the bottleneck for products whereas so far there have been enough dirty ships to keep most Russian oil moving to alternate markets. Read this Reuters note on how these changes are creating windfalls for shippers and some Asian refiners. 

An FT article following the STEO highlighted that the EIA is subtly forecasting that US Gasoline demand will continue to decline over the next two years, which is taken as a signal that it will never again reach the levels we saw before the pandemic. One analyst was quoted in the article as saying that the “heyday of gasoline is over”. Keep in mind that analyst comes from the same parent company that rated credit default swaps as AAA grade investments back in 2008. 

The API reported builds in refined product inventories of 5.2 million barrels for gasoline and 2.7 million barrels for diesel, while crude stocks declined by 2.2 million barrels on the week.  Those numbers seem to have had minimal impact on outright prices so far but may help explain why the gains in RBOB so far are less than half of those for ULSD in the early going.  Considering we managed to go an entire week without a major refinery upset, and many drivers across the south were forced to stay off the roads for 2-3 days, the build in gasoline inventories is really not surprising at all. We’ll get the EIA’s version of the weekly stocks at the regular time today.

LA CARB Diesel basis differentials jumped by 12 cents/gallon Tuesday, after going almost a week without a price change. That basis rally combined with the strong move in futures to push cash prices up more than 25 cents on the day. Reports of a fire at an LA fire could be to blame for the jump, although the lack of trading for several days, and a return to more normal demand patterns after a terribly wet January could also be at play.

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