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Diesel futures continue to oscillate on both technical and fundamental influences. We had mentioned to many, don't be surprised if the March contract touches the support level of $2.65 area when in it was trading above $3.25 in late January. Low and behold on Monday it bounced off $2.6649 before jumping another $.20 over the next two sessions.
The wild ride continues as in just under two weeks, we have erased $.50 of value on the futures market. Front month ULSD fell $.1937 yesterday setting us up for a test of key technical support levels.
Even though Diesel futures have fallen roughly $.20 in the last two days, we are still almost $.40 higher than the beginning of the month. Still optimistic that we will considerably lower in the coming weeks, however.
Diesel Futures have risen just over $.25 in the last week, for largely the same reason as they tanked the week before. China is now lifting most Covid restrictions, as traders now see demand picking up on the world basket. Even though we are still seeing huge weekly swings, the overall temperature of Distillates looks to be cooling off since trading some $.75 higher than presently mid summer (see below).
Future pricing action continues to be as wild as a Patriots game ending, with the average swing intraday running over $.12 from high to low. Yesterday’s bump higher in diesel was somewhat expected on the heels of three strong down days and a fair amount of market moving news on tap.
I’ve been away…..any talk about diesel supply?
News cycles have jumped all over the fear topic of only 25 days of supply of distillates in the Northeast. It is true that PADD1 distillate Inventories are well below the five year average and PADD1A (New England) is even more tight, however, it is important to understand the term “days of supply”. That is defined as if everything stopped today. No production, no pipeline shipments, no vessels, no trucking and we kept using as much distillates as we are at this very moment. Slightly different than how it can be perceived by watching a news clip.
Distillate inventories were actually slightly up this week as exports fell by some 300k barrels per day, although our inventories are still some 20mbl below last year. Key to yesterdays inventory report was that refinery utilization (production) is running at 91% which is up over 4% versus last year and historically this is a high rate.
So what does all this mean?
We have been saying for several weeks that the distillate inventory picture is not the brightest, even more so in New England. The news cycle has taken hold of this, and judging by the number of calls and conversations I’ve had in the last week, it is starting to sink in.
If you were to read the news, it is almost impossible to tell which way the Oil markets are going as the volatility has all pits in wild daily swings. Fortunately for most of us, diesel prices have corrected over $.30 in the last three days and all but erased the early August climb.
In the last 6 sessions we have seen ULSD futures slide just over $.50 in value. While this is good news, the previous 6 sessions added just about the same amount. So basically we are back to the same levels we were mid-August where we all felt pretty positive pricing was moving in the right direction. Much of the rise can be attributed to money being put into the market as an inflation hedge as rates continue to rise, though it is tough to keep that money in long term with the ever present backwardation.
The past two weeks has seen ULSD rise, and subsequently fall almost $.20 on the front month. Much of the dip in the last few days came as market players were able to digest some of the details in the 785 page Inflation Reduction Act which appears to moving its way through. One piece which many believe will have the most impact on futures is that the bill revives lease sales canceled or delayed by President Biden including: one in Alaska’s Cook Inlet and three in the Gulf of Mexico. This section also appears to require the Biden Administration to adopt Trump era directives for 2022 oil and gas leasing established.