Diesel Futures Surge As Arctic Cold Fuels Sharp Rally

Diesel futures are rallying sharply Tuesday, with the February ULSD contract up around 7 cents/gallon (3%) from Friday’s settlement, and dragging the rest of the petroleum contracts into the green despite headwinds from other financial markets.

Reminder: Futures did not settle yesterday so the changes on the screen today are relative to Friday’s pricing, not Monday’s.

The big rally in diesel prices appears to be driven in large part by a spike in natural gas prices with front month Henry Hub futures up more than 26% on the day. A widespread shot of arctic air sweeping the country seems to have caught the market off guard after multiple forecasts for the back half of the month called for higher than average temperatures, and is increasing the odds of some utilities leaning on supplemental supplies to cover the surge in heating demand.

While the cold is set to stretch across most of the country and bring snow and rain to parts of the country that aren’t used to it, refinery row along the Gulf Coast is only expected to dip below freezing for a few hours over the weekend so the risk to fuel supplies should be minimal.

One thing to watch out for in the Northeast: New York and Connecticut both decided 2025 was the year they wanted to follow through on plans to require 10% biodiesel to be blended in heating oil, despite the fact that biodiesel production plummeted during the year. If this stretch of cold lingers, don’t be surprised if heating oil supplies run out at some terminals with the need for blending a scarce product complicating the supply chain. If the states are paying attention and can act quickly, a temporary waiver on the bio blending requirement could be made.

So far a wave of selling in equity markets doesn’t seem to be influencing futures but if the “risk off” sentiment starts to snowball, don’t be surprised if it spills over into the energy arena.

Money managers were making substantial additions to their net long positions in most energy contracts last week with a combination of short covering and new length both at play. Brent crude saw the largest change with more than 50,000 contracts of new speculative money betting on higher prices while more than 35,000 short contracts were covered on the week. The exception to the rule was the ULSD (HO) contract which saw large speculators sell length and add new short positions, pushing the net position held by money managers into negative territory just in time to get run over by this latest rally.

Hedge funds were mixed on environmental credits last week, adding to their net length in D4 RINs and California LCFS credits while reducing their length in D6 RINs and California’s Carbon Allowances.

PBF reported a 3rd unplanned flaring event in the past 4 days at its 160mb/day Torrance CA refinery overnight. That facility was set to wrap up 2 weeks of planned maintenance Sunday night, so the flaring may just be part of their restart efforts and not a sign of lower production ahead.