Diesel Prices Are Trying To Drag The Rest Of The Energy Complex Higher This Morning

Diesel prices are trying to drag the rest of the energy complex higher this morning as their weekly rally has now surpassed 40 cents in less than 4 days. Gasoline prices are resisting the pull higher so far, despite some positive demand signals in yesterday’s DOE report, and remain range-bound for now, while WTI is facing a big test near $100.   

We said yesterday morning that the ULSD contract looked like it was ready to make a run at $3.80 after breaking through resistance on the charts around $3.60 and it didn’t waste any time already reaching that mark this morning.  The last time ULSD touched $3.80 3 weeks ago, it dropped 20 cents the next day, so today’s tug of war with gasoline could prove pivotal.  A break and hold above $3.80 opens the door for another 40 cent run higher for diesel, while a failure sets up a drop to the lower end of the July trading range.

All sorts of news out of Washington that may influence markets as the Senate has made a surprise breakthrough on a bill that includes nearly $370 billion in energy and climate change programs, while the commerce department just reported it’s GDP estimate showing the US is now “not officially” in a recession with a 2nd straight quarter of contracting GDP.

Bad news is good news when it comes to the stock market reaction to FED policy, and it seems like the Chairman’s statement that the US economy shows signs of slowing yesterday was enough to send stocks rallying once again, as it implies that the pace of increase for interest rates is going to slow down after their largest increase in over 40 years. The big rally in stocks following that announcement seemed to spill over to the energy arena in the afternoon, but could also create more volatility if today’s confirmation of that economic slowdown sends the big money funds to the sidelines.

If you’re an energy bull, you may note that we’ve already lived through the recession, and yet yesterday’s DOE report showed a healthy recovery in fuel consumption which could mean the worst is behind us…not to mention that the world still doesn’t have a solution to replace Russian natural gas and distillate supplies.  

Notes from yesterday’s DOE Report:

US crude oil exports surged to an all-time high last week north of 4.5 million barrels per day. That means a total of roughly 32 million barrels of oil (more than 1.3 billion gallons) were sent overseas last week, which makes the inventory drop of 4.5 million barrels in total for the week suddenly less impressive. 

Refinery output dropped for a 2nd straight week, with 4 out of 4 PADDs declining, with the Midwest (PADD 2) leading the way with another major decline in run rates. Given the weakness in Group 3 and Chicago basis values, it doesn’t seem like anyone is worried about declining output in the middle of the country - most of which is unable to be exported – although this could spell trouble in the fall if rates don’t pick back up as Gulf Coast facilities seem to have their hands full trying to keep up with demand from Europe and the rest of the Americas.

Demand for gasoline and distillates were estimated to have climbed for a 2nd straight week putting both products back close to their seasonal 5 year averages after dropping below their seasonal range earlier in July. A big drop in gasoline imports, and the decline in refinery run rates are combining with that tick higher in demand to draw inventories lower after more than a month of gains. 

The inventory declines are most pronounced on the East Coast, which helps explain why RFG gasoline in New York is worth 50 cents more per gallon today than it is in Houston, and nearly 70 cents more than its conventional counterparts in the Midwest.

See charts below.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.