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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.
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).
Hope’s not a four letter word, although, probably not the best strategy in the fuel business.
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 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.
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.
With Friday and Mondays' sessions cutting into the recent losses on ULSD by about $.35, it’s important to keep in mind the trend is still your friend. With early morning action seeing ULSD down $.08, we are still down over $.80 in the last few weeks.
In just over two weeks time, front month ULSD is down $1.00, with over $.50 coming in the last two sessions alone.
