While Energy Prices are Pulling Back, Equity Markets are Cheering the Latest Inflation Reading

Refined products are cooling their heels with a modest pullback Tuesday, after a big 3 day rally that added 18 cents to ULSD prices and 9 cents for RBOB. Crude oil prices are also pulling back after reaching 5 month highs Monday, with reports of a cease-fire agreement in Gaza seeming to contribute to the early selling.

While energy prices are pulling back, equity markets are cheering the latest inflation reading from the monthly PPI report that showed cooler price gains than many were forecasting. As has been the case most days lately, energy contracts are shrugging off the moves in stocks. One thing to watch out for with the all-important inflation readings in 2025 is the recent rebound in fuel prices means energy contracts will no longer be dragging down the CPI and PPI values year on year.

Not buying it? While futures were benefitting from a combination of heating demand and sanctions concerns that can boost demand for exports, diesel differentials in the middle of the country are crumbling again, with both Group 3 and Chicago ULSD approaching a 40 cent discount to futures as inventories swell.

For perspective on how dramatic the annual diesel inventory builds are, the pipeline system that runs from Oklahoma to Minnesota has seen its ULSD stocks increase by 50% over the past 5 weeks as refinery runs have held at high levels while demand went through its annual 2 week holiday hiatus. Demand levels are beginning to recover as expected, and typically we see inventories in the area peak sometime in mid-February before seasonal refinery maintenance and spring demand draw them down. One thing is for sure, with Group 3 and Chicago basis values trading 25-30 cents below their Gulf Coast and East Coast counterparts, pipeline shipments heading inland will be minimized, while truck and rail shipments from the discount zones will be maxed out by those paying attention to the winter arbitrage window.

Los Angeles gasoline basis values surged Monday after a pair of emergency upset notices from Marathon’s Wilmington refinery turned out to be a fire that forced the evacuation and shut down of the entire facility. The company is now reporting to regulators that they’ll need at least a week’s worth of maintenance to fix the issue. While another fire in Los Angeles is certainly unwelcome news, there is nothing to suggest that the issues at the plant are related to the ongoing wildfires, although the high winds in the region certainly aren’t helping either one. One thing to keep an eye on is the region is the first in the country to go through the spring RVP transition thanks to the state’s ultra-restrictive environmental policies. Given the multiple fire issues going on, don’t be surprised if the governor issues a temporary waiver on RVP limits to avoid the political panic of a gasoline price spike.

Exxon reported a leak at its Baytown TX refinery, in a wastewater oxidation unit. Given that the event isn’t directly impacting a production unit, it’s less likely to have an impact on the USGC basis markets.