Refined Product Futures Are Now Trading 12 Cents Lower From The Overnight High Set Sunday Night

Energy futures are trading lower for a 2nd day in a row as a major announcement from the world’s largest exporter seems to be outweighing both fears of the growing conflict in the Middle East and a record-setting run for stocks. 

Saudi Arabia announced Tuesday that it was scrapping plans to expand the Kingdom’s output capacity from 12 to 13 million barrels/day, in what is seen as a sign that the world has more than enough spare capacity to meet demand growth in the next 5 years.   

Refined product futures are now trading 12 cents lower from the overnight high set Sunday night when it looked like the US was being drawn into yet another war in the Middle East.  RBOB futures led the selloff Monday, and so far it’s ULSD leading the move this morning, trading down more than 6 cents after a brief rally attempt overnight was wiped out by the Saudi news. The 200-day moving average is in play for both RBOB and ULSD today and should provide a good short-term barometer on how serious this sell-off is going to be.

Los Angeles CARBOB basis values have rallied more than 30 cents in the past week as Kinder Morgan begins its annual RVP transition, requiring 5.99 RVP CARBOB by the 2nd delivery cycle in February, more than 2 months earlier than many markets around the country will convert to summer grades. That early transition will create both issue and opportunity for the state’s suppliers as the main pipeline network will be shipping a much lower RVP than is required at the terminals for several weeks.

RINs continue their collapse, with both D4 and D6 values trading down to a fresh 3.5 year low around $.51/RIN Monday, compared to $1.60/RIN this time last year. Fundamentally there may still be room to fall as the rapid increase in RIN generation caused by new RD production far outpaces the demand set by the EPA, and technically, there’s an argument we’ll see prices continue to drop into the 30-cent range before completing their inverse flag pattern that’s been in place since prices started collapsing 6 months ago.

The drop in RIN values is welcome news for many refiners as their cost of complying with the Renewable Fuel Standard (AKA the RVO) has fallen to less than $3/barrel, from the $9-$10/barrel range that we became accustomed to over the past couple of years. On the other hand, those refiners that raced to convert facilities to renewable production over the past several years are now watching their margins collapse as the RIN and LCFS subsidies lose value.

The TransMountain pipeline announced it had run into more “technical issues” that will delay the start of that project to alleviate the bottleneck of Canadian crude supply, and opening the Pacific basin to producers. Western Canadian price differentials dropped more than $2/barrel on that news, offering another short term shot in the arm for US mid-continent refiners that are struggling under the weight of weak basis values this winter. The longer term outlook however remains challenging as US facilities that have relied on large Canadian discounts will now be competing with buyers across Asia for those barrels.

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