Energy Futures Are Starting February With Small Gains, After Ending A Strong January

Energy futures are starting February with small gains, after ending a strong January with a sharp pullback in gasoline and crude oil prices. Despite some much back and forth on a daily basis, the weekly charts continue to set up well for a strong spring rally in refined products. 

A big sell-off in equity markets after the FED threw cold water on the plans for a March rate cut seemed to spill over into the energy arena yesterday, even though the correlation between the asset classes has been weak for most of the past year. 

Yesterday’s DOE report showed oil producers are coming back online from the big freeze much faster than refiners, with US output jumping back up to 13 million barrels/day last week. Refinery runs on the other hand declined in 4 out of 5 PADDs with several large facilities kicking off planned maintenance last week, while some others move up their turnaround schedules to try to make the best of units being offline already.  

Despite the drop in refinery runs, lower imports and an increase in exports, US gasoline stocks increased for a 5th straight week. Total gasoline inventories held above the 5-year seasonal average for a 3rd straight week, which we’ve only seen happen one other time since the war in Ukraine broke out 2 years ago. 

Good news/Bad news: The only region in the US to see a notable recovery in refinery runs last week was PADD 2, which also happens to be the region that really doesn’t need more supply. Group 3 and Chicago cash markets continue to trade 20-40 cents below their neighboring regions as suppliers struggle to get rid of their excess. For now, refiners in the region don’t seem to care much that those discounts are knocking $10/barrel or more off of their margins. Read this WSJ article on the Transmountain pipeline to see why that’s about to change.  

The EIA’s diesel demand estimate continues to hover at the bottom of the 5-year seasonal range but is probably understated by around 4% due to Renewable Diesel not being factored into their weekly equation. That’s the good news for suppliers wondering when the winter demand doldrums will come to an end. The bad news is that lack of reporting on RD also means the PADD 5 diesel inventories are probably 4-5 million barrels higher than what the DOE is reporting. In other words, the PADD 5 diesel chart below shows west coast inventories at the low end of their seasonal range, but in reality, they’re more likely above the high end of that range, which helps explain why diesel has been trading for huge discounts to futures in January.

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