The Sellers Have Returned To The Energy Arena After Monday’s Rally Attempt Fizzled

The sellers have returned to the energy arena after Monday’s rally attempt fizzled, leaving the complex near the bottom end of its recent range, and threatening another move lower if the lows from last week are taken out.

It’s not just futures coming under pressure. Gulf Coast diesel basis, the most liquid market for ULSD in the world, plummeted to a 44-cent discount to futures Monday. Those huge discounts would surpass the largest on record for prompt barrels, noting that there were times during the 2022 time spread chaos when calculated values were lower vs prompt futures after Gulf Coast cycles had rolled to the next month. Those big negative values are punishing crack spreads for regional refiners that are seeing their lowest margins in nearly 3- years. The outlook is challenging with the upcoming holiday diesel demand destruction, Mid-Continent values not offering an outlet, bottlenecks restricting flows to the East Coast and through the Panama Canal, along with more competition for exports all suggesting it could be a tough winter for refiners after a record-setting 2-year run. 

For consumers, these lower differentials combined with futures at multi-month lows offer a great opportunity to lock in fuel prices for a year or more well below budgeted levels.

Value for space on Colonial’s mainline were moving in opposite directions Monday. Gasoline (line 1) values dropped sharply to a 4-cent premium, while diesel (line 2) values jumped again thanks to the slump in gulf coast basis differentials. A new challenge for shippers looking to take advantage of the Gulf Coast to New York arb has appeared this week as line 3 values (which you won’t find published) have also jumped to double digit premiums as space to move barrels to New Jersey has rapidly been used up. 

The November CPI reading came in at .1% for the month and 3.1% for the year, continuing the recent trend of cooling inflation that’s had equity and bond markets rallying over the past month. As has been the case for much of the year, energy prices are acting as the biggest check on inflation, with gasoline prices down nearly 9% for the year while fuel oil is down nearly 25%, which takes nearly a full percent off of the total CPI reading. Outside of energy prices, the only meaningful decline in the CPI reading comes from used vehicles, which are down 3.8% for the year. Equity and energy prices didn’t have a big reaction to the CPI report as it was largely in line with published estimates.

Cop Out? The COP 28 climate summit appears headed to overtime as negotiators argue over whether or not to explicitly state intentions to phase out fossil fuels. Meanwhile, the EIA this morning highlighted the race to expand export facilities for LNG in the US, as natural gas continues to prove the fossil fuel most readily available to replace dirtier options like coal if only there were enough infrastructure to send it where it needs to go.

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