Gasoline & Diesel Are Rallying: Has The Complex Found a Floor

Diesel prices are rallying for a 4th straight session, while gasoline prices are moving higher for a 3rd straight day as lingering supply disruptions and optimism for demand seem to be helping the complex find a floor after a big selloff to start the year. Despite the recent gains, both ULSD and RBOB are still trading 10-15 cents lower than where they started the year, leaving the complex in technical no-man’s land unless they can continue this rally beyond those levels. 

Strength in basis, calendar and crack spreads for distillates this week are all indicative of the near term supply challenges being faced by some refiners that are still struggling to get their operations back to normal following the Christmas blizzard. While none of these levels are approaching the huge values we saw last spring and fall, they are much stronger than we normally see this time of year.

The exception to this strength is seen on the West Coast where torrential rains have ground demand to a literal halt in some markets, and just a figurative one in others, but the local refineries weren’t knocked offline a couple weeks ago like so many others were east of the Rockies, which is making for some soft spot markets. 

Add another US refinery to the scrap heap. The Phillips 66 Santa Maria refining facility closed last week, which went largely unnoticed since the facility was small at only 40,000 barrels/day and only partially refined crude for further processing at the company’s Rodeo facility near San Francisco, which is also scheduled to be shut down early next year and converted to RD production.

While the US continues to close and convert refineries, Asia and the Middle East continue to open new plants at a relatively fast pace. A new 140,000 barrel/day plant in Iraq is starting operations this week, with commercial production expected in March. That plant is the first new build in that country in decades, and adds to the new capacity brought online recently in Saudi Arabia and Kuwait that is shifting the flow of refined fuels globally from East to West.

The EIA’s monthly energy report forecast that the US will see GDP contract in Q1 and Q2 (which is AKA a recession) before resuming growth in the back half of the year. The report includes a new “between the lines” feature this month giving more insight into why the government sponsored analysts are predicting why oil prices will drop over the next 2 years.  Hint: They see more supply than demand. Along with the drop in oil prices, the EIA is predicting that refinery margins will also contract thanks to the aforementioned increase in refining capacity elsewhere, which will help lower refined product prices over the next 2 years. 

The API reported a huge build in oil stocks of nearly 15 million barrels last week, as Gulf Coast facilities no doubt opened their doors to imports they’d been holding off on until the new year, and refineries weren’t processing as much as planned due to the various disruptions. Gasoline stocks increased by 1.8 million barrels on the week and distillates increased by 1.1 million barrels, a sign of the typical winter demand doldrums we experience every year coming out of the holidays. The DOE/EIA’s weekly report is due out at its normal time this morning.

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