This Week’s Rally Has Refined Products Eyeing New Bull Market

Gasoline prices are trying to lead the energy complex higher for a 4th straight day, despite some bearish demand figures in yesterday’s DOE report. ULSD Prices were resisting the pull higher, trading in negative territory most of the night, but have recently pulled back into the green, and would mark a 5th straight increase if they can stay there. 

Despite the strong rally this week, refined products still have more work to do to erase the heavy losses we saw to start the year, which could make the next few sessions pivotal in determining if we’re in the early stages of a new bull market, or just stuck in a sideways range. Multiple short term technical indicators have moved into bullish territory this week, so it looks like we’ll at least see an attempt to take out the highs for the new year soon.

After the largest drop on record last week, the EIA’s estimate for total US petroleum demand did not recover much in the latest report, and is starting the new year nearly 3 million barrels/day (roughly 14%) lower than where it was to begin 2022. Gasoline is the biggest culprit in the weak domestic consumption figures, barely bouncing after last week’s huge drop, and still hovering near levels we saw during the first year of the pandemic when most companies were still working from home. 

So why did gasoline prices rally a dime on a day when the government told us that demand is terrible?  Possibly because the last week and first week of the year are always the worst times for consumption, and they’re now in the rearview mirror. Or, perhaps because the same report showed that more than 1 million barrels/day of refinery production remains offline as a handful of facilities are struggling to return to service after the Christmas blizzard. Or, even more likely it had no fundamental reason at all, and was driven by momentum chasing algorithms programmed to buy as the complex moved further away from the lows set last week. 

Diesel demand did see a healthy bounce last week, and was estimated to be slightly above year ago levels last week. All 5 PADDs are starting the year well below their 5 year average inventory levels, but most have recovered substantially over the past few months compared to the extreme tightness we witnessed for large parts of 2022. While a warm winter has been a huge help to get distillate stocks back to more manageable levels in Europe and the US East Coast, if the refinery runs can’t crank back up to normal levels in the next couple of weeks, more shortages look like a certainty.

The exception to the shortage concerns remains on the West Coast, where the unrelenting deluge continues to hammer demand, while refineries have been able to continue operating, which has pushed regional gasoline inventories to unusually high levels to start the year. 

The December CPI reading showed inflation at 6.5% in the US over the past 12 months, with “core” inflation readings at 5.7%. Both figures were in line with estimates, so they did not create big swings in either energy or equity markets in the immediate aftermath of the report. Rapidly falling gasoline and fuel oil prices helped the monthly figure drop by .1% in December, after rising energy prices were the biggest driver of inflation for most of the past 2 years. 

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