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ulsd (2)

Northeasts' Diesel Supply Crunch Keeps Price Pressure Up

There is a fair amount of news on the lack of diesel available in the northeast, and it is actually true. Last week’s DOE report showed that PADD 1 (East Coast) had 95mbls of diesel, that is down from 123mbls last year and 142mbls from 2 years ago. 

The question is why? 

There are primarily three main roots to the current situation.  First, the East Coast has only about 7 refineries operating now, with a capacity of just over 800,000 bpd.  That is about half from what it was 12 years ago.  Most have closed due to lack of margins and increasingly more difficult EPA standards to meet and the costs associated with those updates.  This means product must come from the Gulf coast via the Colonial pipeline or barged in. 

Secondly, with the steep backwardation in the market, many traders were not willing to take the chance on sending product into the Northeast. Rather, they are taking the sure bet by shipping distillates to Europe. 

Finally, Europe’s diesel based economy is seeing astronomical pricing for the much needed product.   With about 10% of their typical supply coming from Russia, the ongoing conflict in the Ukraine is pushing pricing for distillate barrels to record highs. 

Again, we know refiners are putting out as much distillates as they can right now.  There will be some trying to capitalize on the current high prices and once those barrels hit, we should see some price easing.  It is just a matter of when.

 

5-16 ulsd

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Volatility on Diesel Keeps Everyone Scrambling

The volatility within the ULSD pit continues to keep everyone scrambling.  $.20 swings from high to low have become the norm.  That coupled the lack of product in the Northeast is putting real stress on not only suppliers but customers alike.  As we mentioned a few days ago, refiners are stocking up on crude and producing as much distillates as they can.  Evident in yesterdays Inventory report that showed Crude surge 8.5mbls and distillate output up over 160,000 bpd.  While diesel inventories still remain low, down almost 1mbls, the demand numbers, down almost 200bpd are pointing to sure fire demand destruction. 

Again, the timing of when that downward drop may take hold is tough to tell.  Judging by the chart below, we may already be at the beginning stages of it.  The backwardation of roughly .20 JUNE to JULY is still keeping many from bringing in any inventory which is keeping cash prices high.  Those differentials, at historic highs, really have only one way to go I would like to think. 

Most of us are hoping to wake up to pit that is down $.50 but it seems that the market is always able to find something to erase the losses.  Today is a perfect example.  ULSD was down almost .20 earlier and found a way to get almost .04 higher during the session.  As I type it is down roughly $.04.  Inflationary risk buying appears to be the driver, which I would have though that we would have seen less of as last month’s squeeze that sent shockwaves through the market with lingering effects. 

We are working day and night to maintain our service standards and product levels.  Please do not hesitate to reach out with any questions.

 

Thu 5-12

 

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High Prices are the Cure for High Prices?

The other day I mentioned how the futures markets rose, yet the cash markets fell.  Yesterday was the reverse for some.  While ULSD futures closed down $.1557 to $4.0413, ARGUS cash trading edged up .0193.  We are obviously in the most volatile period I have seen in all my years.  

Of note in the last day we have heard that OPEC+ nations will stick to their planned production increases that were set in place back in July 2021 rather than opening the spigots to temper prices.  Additionally, it appears as though most European nations will move forward with a stepped embargo plan of Russian fuels. 

The backwardation in the diesel pit over the last two weeks put crimp on in tank inventories especially here in the Northeast.  That situation appears to be getting better as the JUNE to JULY backward spread is roughly $.20 and word is that the supply picture is getting better.  But again, when prices shoot up like a rocket, they fall like a feather.  It will take some time for these prices to get back to a “normal” level as it noted that most refiners have moved to what is called Max Distillate Production,  meaning they are trying to produce the most Diesel, Jet Fuel, Heating oil, etc. possible, so that they can capitalize on the high crack spread. 

We have said many times before, high prices are the cure for high prices. 

As you have all now seen street diesel prices over $6 per gallon, this has to be a hit on demand in the short term and those extra distillate barrels should hit the market at the same time.  I would like to see us retrace a $1.00 from here, but my guess is that it might take the summer to do so. Then again, as shown below on March 9th we did drop almost .50 in a day.  I would think we would need a cease fire in Ukraine for that to occur.

ULSD MAy 6

 

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ULSD Continues to Skyrocket on Short Squeeze

Unfortunately you are all reading your nightly pricing correctly.  As seen below, ULSD prices have risen almost a full $1 in the last four sessions. 

2022-04-28_12-40-27

As I mentioned earlier in the week, it is likely due to a short squeeze versus anything fundamentally related to the Oil Markets.  Although there are some pointing to distillate stocks being at their lowest level in 14 years as a driver, it appears that is being over played because demand for ULSD has fallen for the fifth week in a row. 

Front month MAY ULSD (which falls off the board Friday) is a full $1 higher than JUNE trading presently at $4.9950.  It is $1.50 higher than front moth NL @ $3.5250.  Its important to note the disconnect to Crude which is “only” at $103 and change.  For those of you that remember July of 2008, when Crude was at an all time high of $147, Diesel was trading just above $4.00.  All the more evidence to point towards a squeeze versus fundamental factors. 

The problem is, how long does this last?   Looking at the strip above, the backwardation is still healthy out through December, not as pronounced but still present. 

I would like to say that we are past this after Friday, but my feeling is the rocket ship-feather theory will hold true. 

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News & Fundamentals Reverse ULSD Slide

On Tuesday morning we were feeling pretty good, relatively speaking, as the ULSD pit was almost .40 less than a week ago.   Demand concerns over China’s lockdown and slowing production rates put pressure on an already inflated market. 

Unfortunately, in the last two session we have gained all that back and then some.   News flow is the clear driver, although fundamentals gave support for yesterdays jump.  As fears of no end in sight for the conflict in Ukraine heighten, it forces NATO countries to impose stricter sanctions on Russia - even floating the dreaded “embargo” word around.  Additionally, OPEC stated it does not intend to increase output to offset any Russian barrels in the marketplace. 

Fundamentally speaking, Wednesdays inventory broke a cardinal rule for traders…. Don’t surprise them.  

Expectations for gasoline were for a 800,000 bl draw with a 3.6mbl draw being reported.  Distillates were expected to fall 1.5mbl and that doubled with a 2.9mbl draw on inventory.  Keep in mind, we typically see a destocking period this time of year due to product changes.  It doesn’t appear that domestically there will be any policy changes that could calm the market. 

Looking forward, as you can see from the chart below, are a full $1.00 higher than where we should be.  It certainly is a challenge for all dealing with these prices, as it affects every part of your business. But as we have seen in the past, this market has the ability to pivot at any time and we could very well see another .50 down day.

4.14 ULSD

 

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Wild Intraday Swings on ULSD

The last three sessions have seen .4373 get peeled off the ULSD front month contract, with massive intraday swings.  Yesterday at the open, APR22 ULSD fell almost .25 before rallying back to finish down only .0673. 

The big drop on Monday was attributed to China locking down Shanghai amid new outbreaks for a minimum of four days thus putting demand fears into the market.  Tuesday saw traders take into account that there appeared to be progress in peace talks amongst Ukrainian and Russian delegates, but that subsided as the day went on.  This morning that sentiment furthered as it appeared there was nothing to report on the situation other than both sides would agree to meet again.  It is clear that many sanctions that have been put in place, may have a longer stay even if there is a withdrawal.

Pricing is wild right now, cash markets are making it even more challenging. 

The Chart below doesn’t do much other than confirm Warren Buffett’s take “that if you flip it over, it says the same thing.” 

With Demand appearing to take a hit in this week’s DOE report, and subsequently Inventory rising, products have come off there morning highs by about .15 and are only up about .04 at present.  On a positive note, most OPEC nations have come out and stated the they would not let Politics get in the way of production levels, which may calm supply fears, evident in the .32 backwardation APR to MAY.

ULSD 3.30.22

 

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March Comes in Like a Lion -ULSD See-Saws on Russia, Inventories

March came in like a lion, lets hope it goes out like a lamb…..  

So far this month, front month Diesel shot up over $1.80 to peak just above $4.60, then proceeded to fall $1.60 to just under $3.00 and now has risen back over $1.00 to be currently trading just north of $4.00.  What’s even more wild are the intraday swings.  Believe it or not, yesterday morning we were actually negative for a bit earlier in the session before finishing up over .25 on the day.  Today is opposite thus far, being up almost .10 early on, and now trading down .04. 

Obviously the Russian invasion is still the main catalyst for the rise, as fears linger that the US does not have a quick enough reaction time, or a plan in place to domestically produce more should this conflict linger.  Unfortunately, politics are weighing in on some rational decisions.  Many sanctions put in place have special caveats carving out energy like todays joint action from the European Union to date has carved out sanctions exemptions to allow continued imports of natural gas and oil from Russia, given the difficulty and expense of quickly finding alternative supplies “  Yesterdays big rise was after the weekly inventory report that showed large draws in all products, again not fundamentally tied to any Russian sourced product, just the fear of our inability to react. 

I am asked 50 times a day, What is going to happen? I honestly wish I knew, but what I can say that from a business perspective is that you need to be nimble and able to pivot. While I doubt this is going to be the new normal and will likely short lived, the effects of these records prices are going to linger for some time.

Market Screen 3.24.22

 

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No, You're Reading that Right: ULSD Futures up .80 in 5 Sessions on Ukraine

What you are seeing on your nightly pricing is real, unfortunately.  ULSD futures have risen over .80 in just 5 sessions.  Since late November 2021, when the concern of the latest Covid Variant were announced, the pit has risen over $1.65. 

As we all know that leading driver is the uncertainty surrounding the Russian- Ukrainian ordeal.  Financial Sanctions on Russian assets, banning imports, along with OPEC+ group not willing to increase production has attributed to the fear spike in the markets. 

There is a bright side. 

Front Month ULSD is presently trading at the $3.60 level… however, if you look at the outer months, such as JUL & AUG, they are in the $3.00 range.  This is a .60 backwardation in the market.  In all my years, which has seen Hurricanes, Wars, Attacks on US Soil, I have never seen this large of a backwardation.  As we all know, there is typically a “carry” in the markets where outer months are typically higher.  This is a very good indication that we are in a short term situation.  Its just a matter of getting through this.  I am sure we are sick of the phrase “WHEN THIS IS OVER”! but....

Below you can see the live market chart along with last nights settle highlighting the backwardation.

apr 2022 candlestickapr 2022 price chart

 

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Will Crude Break $30? Will RBOB follow ULSD Below $1?

Picture of a man grasping his head looking at computer screens

Yesterday, Crude briefly dipped below $30 per barrel for the first time in 12 years, before closing slightly over at $30.34. Crude was up on the overnights, as a result of the API forecast projecting draws of close to 4mmb.

The EIA report this morning, however, quickly reversed the market trajectory when it showed a build of 230K barrels. A modest increase, but the market registered it as significant in the face of the projected draws - at least initially.

At the close, Crude was essentially flat, up slightly to $30.48/bbl.

Despite the slight edge up today, so far Crude is still down almost 15% since the end of 2015.

On the refined products side, analysts correctly projected builds in gasoline - sort of. The expectation was a build of 1.6mmb but EIA data indicated an astounding build of 8.4mmb which sent RBOB tumbling, especially as it comes on the heels of last weeks 10.6mmb build.

On top of product builds, gasoline consumption is down a little over 4% compared to this time last year, which is also weighing on RBOB. At the close today, gas was down over 3, settling out at $1.0528.

Two weeks ago the debate was would RBOB break $1.10 - now it looks like the question over the next week or so could very well be "will RBOB follow ULSD below a dollar?"

Distillates showed a build of 6.1mmb as well, and this on the heels of ULSD dropping below $1 on the screen, following its drop on the cash markets. Tuesday broke the $1 level - closing down .0248 to $0.9901, and today ULSD shed another 2 to settle at $0.9694.

In addition to the build, distillate consumption was reported as being down 12% versus this time last year, partially as a reflection of the precipitous drop in heating oil usage due to our unseasonably warm weather.

On a macro level, the Chinese economy continues to stumble, and US stocks continue to get battered as they essentially have been since the opening bell of 2016. Today, as of writing, the Dow is down over 300 points, the Nasdaq is down triple digits as well, and the S&P is officially in correction.

Additionally, as mentioned before, the ongoing standoff between the Saudi's and Iranians after severing diplomatic ties ensures that at least for the time being, OPEC production will remain at record levels. Add in the unseasonably warm weather and the drops in demand/consumption across the board, and all of the sudden that "crazy" projection by some that we could see oil in the $20's doesn't seem so crazy after all.

 

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NYMEX, WTI Jump on Shale Slow Down & Inventory Concerns

Barrels of oil overlaid on a line graph

The NYMEX shot up again today, after trending slightly downward the past several sessions. Last week saw Brent over $65/bbl and today WTI settled out +1.50 to 60.75, over the $60/bbl benchmark we've all been watching for.

ULSD closed up +.0535 to 1.9989, while RBOB shot up over the $2 line again with a gain of +.0529 to settle at 2.0393. 

Our friends at OPEC came out earlier this week to announce they saw no increase in oil prices on the horizon, given they see no decrease in production, and denied reports that there was consideration of reinstituting production quotas to boost prices. This pumped the brakes on the rally temporarily, and resulted in a pummeling of energy stocks in the S&P in the process - most notably Exxon and Chevron shares (Both companies saw gains today, however, on the price reversal).

So what happened today?

Most analysts are crediting a weaker dollar in combination with the monthly drilling report that indicates some slow down in shale production domestically. The EIA projected that output from major shale plays will drop by some 86K bpd in June.

Analysts also expect to see draws in crude on tommorows EIA inventories report, which is almost always good for a few cents worth of upward pressure on the market - at least if they are correct, that is.

Outside of drilling and supply concerns, we once again saw resumed airstrikes in Yemen on the same day a cease-fire was to be discussed.

Deja vu, anyone?

Stay tuned!

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