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Diesel Futures Rise, but Overall Trend Suggests Cooling

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). 

Domestically, this week saw distillate demand still strong, which surprised some.  Still might be some residual power plant use feeding those demand numbers. With Crude showing a huge increase in stocks this week, gaining 19 mmbls, one would have guessed it would have set the whole market downward.  We mentioned that cold snaps, storms, and a pipeline reopening might need a week or two to shake out the inventories and traders took that to heart.  Signs of moderating inflation figures have some thinking the doom and gloom of a full blown, long term recession, might be over done and we are in for a “soft landing” or a purposeful slowing down of the economy. 

Futures are currently on the upswing of the curve, but again, the pattern suggests a sharp pull back.  The backwardation in diesel futures is still hanging around, actually widening in the last several sessions, making some suppliers keep a watchful eye on inventories.  As we work into the heart of the winter, don’t be surprised if outages of distillates pop up.  Again, a strong relationship with your supplier will keep your business running. 

jan 23 ulsd

 

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Volatility Continues in ULSD Market

Extreme volatility continues grip the futures markets as the USLD pit erased almost $.30 in the last two days.  Even though its up about $.05 currently, expect this sell off to continue for the short term. 

Much of the market has hinged on the anticipated rebound in global demand, largely centered around China.  After being basically cut off from the rest of the world for the last two years, signs were pointing to Covid restrictions and cases easing.  Those hopes took a gut punch Tuesday as reports surfaced that a surge in Covid cases has caused the country to basically halt their rollback of restrictions. 

Fundamentally, the market appears to be better supplied, which is also putting downward pressure on futures.   Physical markets are still seeing wide ranges in price action from one day to the next and some local outages are still popping up. The good news is that last weeks cold snap that pushed freezing temps into the heart of production country left little to no damage to refiners - lessons learned from the hard freeze a few years back. 

Demand spiked briefly last week as many power plants were forced to burn oil for a few days.  It will be interesting to see what inventories look like (which are due today, delayed a day for the holiday).  Keystone is operational, but will not be 100% for another few weeks so there will likely be some shaking out period with the numbers. 

Overall, it looks like we are starting another pull back which hopefully puts front month ULSD futures in the $2.70 range.

1.5.23 ULSD

 

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Intraday Swings Continue

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. 

First, it appears the damaged section of the Keystone Pipeline is fixed and testing runs are scheduled to take place in the next day or so, but full operation is still weeks out.  This is good news for Cushing to start to rebuild lost input in the last week. 

Secondly, a high profile visit to the White House and Congress by Ukrainian President Zelenskyy all but assured continued US backing of the non-NATO country in its efforts to stave off continued Russian advances.  Hard to interpret, as some have the sense now Ukraine can actually prevail in this, while others are viewing this as a very tight rope to walk supplying billions in aid and defense weapons, somewhat cornering Putin. 

Thirdly, Inventories showed a steep drop in crude of 5.9mbl (expected as we said last week the pipeline shutdown would show this week).  Gasoline showed a modest build of 2.5mbl but Diesel dipped for the first time in five weeks with a slight draw of just 300,000 bls.  The key driver yesterday appears to be that distillate demand is still healthy showing a 6.6% increase over last week.  Much of it appears to be attributed to the expected extreme cold taking hold of the middle part of the country and power plants stock up on alternate fuels.  Locally in the Northeast, supplies are getting better but still seeing a lot of just in time ship arrivals and kerosene pricing has eased but still at much higher values than previous years.  Hauling capacity looks to be the next hurdle facing region and should the extreme cold linger, it might get rough for some.  That strong supplier relationship we talk about will get you through the next several weeks. 

From all of us at Dennis K. Burke, Inc.  we wish you a very happy, healthy and safe Holiday season!

ULSD 12-22

 

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ULSD Cash Markets Correct & Backwardation Cools

A few weeks ago we hoped to see ULSD trading $.50 lower, as the cash market was tumbling at warp speed.  And would you look at that, here we are! Much of those losses have come from the last 5 sessions alone. (see chart below). 

At the same time we have seen the market backwardation almost get erased.  Suppliers should be more willing to put product in tank versus working hand to mouth.  The JAN to FEB spread is now a mere $.01, it wasn’t long ago that is was over $1.00, and the summer months are all but flat.  So, cash prices have corrected, Futures prices have collapsed (again) and the backwardation is going away!  Great News!…. Let’s not break a piñata just yet. 

Inventories reported large distillate and gasoline builds, both in the range of 6mbls with exports of finished product dropping as well.  Again, what we said needed to happen.  The JAN screen is about $.17 higher than pre Ukraine invasion, and about $.70 higher than a year ago.  The key is that it appears that demand is starting to slow, be it from rate hikes (intended to slow inflation) or higher costs all around, most point out that next year will be soft in terms of demand and spending in general. The goal now is to normalize and hopefully not get too deep into a recession that could take years to recover.

OPEC is staying the course on production levels, China COVID fears are also hitting demand on a world level. The Russian Oil cap of $60 per barrel is still playing out.  Going into effect on the 5th, the G7 measure aims to limit that what Russia can profit from their crude and subsequently curtail the money needed to sustain a Ukrainian takeover.  However, non G7 nations such as China and India are already taking additional vessels of Russian product, so the net result remains to be seen.  Point being is that there is a fair amount of fundamental variables out there that will continue to weigh heavy on the pricing of product. 

Kerosene is still very scarce across the region and cash values are still almost $3 higher than diesel thus prices will remain higher in comparison for much of the winter.   Buy the rumor, sell the fact is the old saying. I don’t see that going away anytime soon, we just may be at a new normal when it comes to pricing, thankfully much less than we have seen in the last few months.

ULSD 12.8

 

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Diesel Cash Spreads Normalizing, but Kero Concerns Lurk Ahead

Hope’s not a four letter word, although, probably not the best strategy in the fuel business. 

Two weeks ago we had said that hopefully we see pricing top out as supply appeared to be moving into the Northeast.  That looks to be occurring, as cash values have dropped at twice the speed of futures and almost catching up to normal spreads. (see below).  

On 11.9.22, cash prices were $1.20 higher than futures, as of today they are $.0150 higher.  This means that diesel product is being shipped, getting purchased, and somewhat loosening the supply constraints for some.  Thus the reason you have seen your prices fall so dramatically the last few weeks.  However, supplies do remain tight as the backwardation persists, limiting some Suppliers from taking product in tank along with an uneasy feeling on demand over the next few weeks. 

The other elephant in the room is Kerosene, which is in extremely tight supply throughout the region.  A niche product used primarily in the Northeast and Central US for outdoor heating and road fuel winterization is still seeing record high prices as many try to source gallons. 

As I have discussed with many of you in the last few months, diesel-kero blends for winter operability purposes will be high relative to years past.  

With Crude pricing falling to 10 month lows this week capturing much of the headlines and rumors of an OPEC+ production increase (albeit quickly dismissed) swaying markets somewhat, the real focus should remain on Distillate pricing.  Again, the volatility looks to stay in place until the forward months level out and we see how the Russian price cap plays out that is due to take effect on 12.5.22.  It was just in late September that ULSD traded roughly $.50 lower than present.  Still hope.   

As always, the Team at Dennis K. Burke is here to assist and answer any questions you have.  Have a safe and Happy Thanksgiving.

 

ULSD Cash vs Nymex 11.24.22

 

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PADD1 Inventory Fears Keep Pressure on Suppliers

padd1

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?   

For many years, having supply contracts was the standard in the fuel business.  As time went on, predominantly in gasoline, this shifted to suppliers selling excess gallons at the going price, commonly referred to as “rack” gallons.  Because there is very little excess product, the rack marketer is put on the sideline while the contracted supplier keeps companies rolling. 

Future pricing turned positive yesterday on the draw of Crude stocks (makes sense because of the high production rate) and the FED adding another 75 point basis hike to key rates.   Cash values turned negative as there are some rumblings that we actually may see a release of finished product into the northeast in the next week or so.  While this is a temporary measure, it could loosen up for just enough time.  Look for price action to remain volatile over the next few weeks with hopefully a trend to the downside.

ulsd dec1

 

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Distillate Inventory Concerns Persist, Particularly in New England

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. 

We currently sit about 20 million barrels below last year of distillate inventory.  The chart below shows a five year picture and very infrequently would we dip below 120mbl of storage.

inventory chart

With winter approaching, and New England the primary consumer of Heating Oil, the fear is there will not be enough to go around should there be an extended period of cold.  Moreover, if power plants get curtailed from using Natural gas, the alternative source is diesel fuel. 

Courtesy of NEFI, the winter temperature outlook shows the Northeast to be in the third year of a La Nina pattern and that typically means a warmer than average season ahead of us, albeit with a colder December to start. 

weather chart

Exports of Distillates continue to be robust, as we are sending about 1.2mbl per day overseas.  Last week we mentioned that quick relief might come in the way of releasing finished product reserves into the market instead of unfinished crude.  That has fallen by the wayside over the last several days, as this is a market condition and not a physical event, like the last release during Super Storm Sandy. 

Government officials have been quoted as saying “nothing is off the table” in terms of a solution and we have now seen another idea floated which on the surface makes sense.  It has been suggested to relax the sulfur specification on distillates to allow shuddered refining equipment to come back online, thus boosting production and requiring products to remain domestically. 

Years ago, refiners chose not to invest into units in order to produce the ultra low sulfur products we use today (15ppm vs 500ppm).  Opponents say that the turn around time would be too long, and not the quick fix we need. 

Price action continues to be extremely volatile, and I would expect that to stay through the end of the year as the backwardation in the market remains, limiting any excess or “rack” gallons to be available.  Again, having a supplier with a redundancy of contracted supply options and the means to get you product will get you over this hump and better positioned in the future.

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Cash vs NYMEX Blowout on Supply Concerns Keeps Diesel Elevated

If there is one thing that I am sure of in all my years in this Industry it is that Customers do not like surprises

The last two weeks (or two years for that matter!) have certainly offered up many surprises.  News over the last three days has highlighted “Crude prices falling”, however, the disconnect from Crude pricing to the finished diesel product pricing has never been more sharply contrasted. Front month Diesel futures have once again skyrocketed $.80 to touch the $4.00 level in the last two weeks for the fifth time.  The rapid rise and rapid drop cycle doesn’t seem to be ending anytime soon. 

The big surprises have come in the way of Cash Diesel prices rising more than futures.  As illustrated above, diesel cash values have blown out over $.50 over futures values.  The month prior they were practically even, and historically they tend to only be a few cents apart.  So why?  

Realistic concerns over product shortages in New York Harbor hit the market in the last several days as not many offers were taken on barges. What that means is that product is still moving overseas versus into US ports, thus slowing resupply and pushing up pricing for any product already in tank.  Cash markets move racks more than futures do, although most only look at the NYMEX as the driver. These types of cash to screen blowouts are historically short lived. (We can only hope this is not another “historic” trend change, I think we can all agree that we’re tired of those).

Be sure your Supplier has adequate, guaranteed supply and the ability to get product to you as the fewer the surprises you have, the better.

 

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Volatility Continues with Economic Concerns, Export Increases

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 slide the last week has come as demand concerns continue to make headlines and more currently China is again locking down several major cities with COVID concerns.  Yesterdays inventory report seemed Bullish on the surface with draws on all products but like anything, the devil is in the details.  Many saw the latest news cycle highlighting the possibility of fuel shortages coming this winter.  A good explanation shows in this weeks report.  Refiners are operating at pre-Pandemic levels, yet domestic inventories of finished products are still down- the key factor is that our exports of gas and distillates are up over 500m b/d over last year. 

Again, it is still better for companies to ship products overseas to get 5x the value than if it were to sell into the US markets.  Forcing US producers to sell into US markets versus formerly heavily Russian supplied countries may appear as abandonment in their time of need politically speaking, and moreover, will that force those countries to “amend” Russian import sanctions……thus it’s a delicate balance.  

The field seems to be mixed on the last few months of the year in where pricing will be headed although the common theme is that the volatility, up or down, is here for a while.

Sept 1 ULSD

 

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Inflation Reduction Act Helps Keep Downward Trend Intact

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.

 Yesterday was clearly driven by inventories and demand concerns with gasoline.  However, distillates were the red headed step child, shrugging off any loses and actually finishing the day higher as demand numbers stayed healthy and inventories dipped.  Crude and gasoline took all the attention with a surprise build in crude and an almost 8mbpd drop in gasoline demand.  It’s really an odd disconnect but many of us actually see it on a daily basis.  Construction, trucking, etc remains strong but on a personal level we may be starting to pull back our own driving habits. 

An OPEC+ hike of 100,000 bpd is rather insignificant as they usually over produce or under produce by that much anyway.  Markets will always have bounces in either direction but often time the trend is still intact, and it appears the downward trend is still there. 

August 4 ULSD

 

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