The Drop In Diesel Prices Is Being Blamed On The Economic Slowdown In Europe

ULSD futures are trading lower for a 4th straight day with early losses around 3 cents for the November contract, marking a 20 cent drop from Friday’s highs. RBOB gasoline futures are heading the opposite direction in the early going, with 2.5 cent gains taking back some of yesterday’s big losses.

Much of the drop in diesel prices is being blamed on the economic slowdown in Europe, which was highlighted this week by weak manufacturing and spending data from Germany and France. The diesel weakness isn’t limited to futures trading, with basis markets across the country moving lower this week, and most regional cash markets trading now trading at a discount to futures. 

Headlines continue to suggest that de-escalation of the war in Gaza is the reason prices have pulled back, even though attacks on US and Israeli targets from Iran-backed groups has surged in recent days. Perhaps more important than the diplomacy hopes is that Saudi-Arabia’s long time opponent Yemen fired cruise missiles that were intercepted by a US naval ship and Saudi defenses, which is a sure sign that the world’s biggest oil exporter is unlikely to join forces with the Iranians as they did 50 years ago.

The API reported inventory declines across the board last week with gasoline stocks down 4.2 million barrels, diesel down 2.3 million and crude oil down 2.7 million barrels. The EIA’s weekly report is due out at its normal time today, but the agency has given notice that its reports two weeks from now will be delayed to complete a system upgrade. 

China is reining in the rampant refinery expansions we’ve seen the past couple of years, by setting a national capacity cap and minimum size limits on new facilities. It appears that these new regulations won’t impact the new facilities under construction, so near term, the country is still poised to control the refined product trade flows to and from Asia, depending of course on what the Politburo allows those facilities to do.

A Bloomberg opinion piece this week highlights the recent challenges for gasoline margins at the refining level, and notes how the Middle East flare up makes the rationalization process for refining more complicated. For those that prefer the cliff notes version: “The economically rational response would be to close less competitive refineries, leaving room for the largest, most advanced plants to run profitably. But 50 years on from an attack on Israel that sparked the first oil crisis, and with the Middle East in turmoil once more, economic rationality counts for only so much in a world where energy security is again in focus. Pressure on gasoline margins will challenge governments as much as it will refiners themselves.”

Valero reported an upset at its Three Rivers refinery in South Texas Thursday, with unplanned flaring expected to last 24 hours. This comes a day after a power loss impacted multiple facilities in the Corpus Christi area.

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