Diesel Prices Are Falling For A 4th Straight Day

Diesel prices are falling for a 4th straight day and have wiped out 2/3s of the 30 cent gains made during last week’s 5 for 5 price rally, as the EIA and IEA reports both threw cold water on the bulls plans for a spring rally. RBOB gasoline futures were dropping for a 2nd day, giving up 12 cents in less than 24 hours, but were attempting a come-back to trade near breakeven for the day around 8am.

Adding to the bearish sentiment this week are reports that the huge new Dangote refinery, which is the main wild card for Atlantic Basin refining capacity this year is offering its first export cargoes. If you read closer however, you’ll note that the exports are for unfinished products, suggesting that the downstream units needed to produce finished gasoline and diesel aren’t yet up and running.

Consistent with the pattern for most of the past year, the IEA took a much more bearish tone than OPEC in its monthly oil market outlook, noting that global demand growth is losing momentum. The IEA’s report highlighted the impact of the January freeze event on oil and refining operations but predicted that we’ll see refinery runs in the US bottom out in the next week or two before accelerating into spring. Both reports are consistent in their supply growth estimates however, with global oil output expected to set a new record this year, with the US, Canada, Guyana and Brazil leading the way, and keeping a cap on the call for OPEC’s supply, while the shipping disruptions in the Panama and Suez canals will help keep prices backwardated.

Notes from the DOE’s weekly report:

Crude oil inventories had a large build as expected last week with 450mb/day of refinery production from BP’s Chicago-area refinery shutdown, and a positive reversal of the crude oil correction factor both driving the big increases. 

The price reaction following the report was decidedly bearish with both RBOB and ULSD losing roughly a dime following the report, which estimated that US fuel demand dropped sharply last week.  Of course, the government estimates on consumption are notoriously fickle, so the reaction could be more a sign that the bulls weren’t ready to carry through with the breakout threat they made last week.

Gasoline stocks in PADD 2 had reached an 8 year high prior to the Whiting downtime, which helps explain why prices aren’t having a bigger reaction to the extended shutdown of the region’s largest refinery. Those inventories are drawing rapidly now but remain in-line with the seasonal trend of inventories peaking in February, then declining sharply as we move through the spring RVP transition.

The situation is even more bearish for Midwestern diesel inventories which continue to hold at the top end of their seasonal range and roughly 15% above year-ago levels despite that refinery downtime, which is why we’re seeing cash markets in the Group and Chicago still hovering around 20 cent discounts despite a 500mb/day decline in PADD 2 run rates last week. The export market for diesel is looking sluggish as well, with outbound movements slumping below the 5-year average, despite reports that the Red Sea disruptions would drive more demand for products to move from the US Gulf Coast to Europe. 

One sliver of hope for diesel bulls is that the official demand estimate is understated by around 4-5% nationwide due to the EIA not recognizing RD in the weekly reports, but that reality also makes the PADD 5 diesel inventory chart below look awfully bearish when you realize that there’s more than 4 million barrels of diesel inventory not being recognized.

PBF reported a loss for Q4 this morning, underachieving most other refiners during the quarter. The company tried to sound upbeat in the report, noting that strong earnings earlier in the year had allowed them to shore up their balance sheet. Most noteworthy on the margin front was that the Toledo facility operated at a negative gross margin of $1/barrel during the quarter, detailing just how brutal those big negative basis values really can be for refiners, while their East Coast and Gulf Coast facilities operated at less than $5/barrel of gross margin, which wasn’t enough to cover operating costs. The company’s renewable diesel JV also produced below expectations, but that was blamed on a catalyst change rather than the softer margins given the collapse in RIN values last year.  

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