Rallying Distillate Futures Push Energy Complex Higher

The rally marches on to start a new week with refined products up 3 cents so far on the day, reaching their highest levels since mid-November. Both fundamental and technical indicators suggest this rally may have more room to run, as more refinery issues crop up in the US and Europe, and prices have broken through their near term resistance on the charts.

Diesel prices are up 58 cents from their January 4th lows, following the largest selloff to start a year in 3 decades with nearly 3 weeks of strong gains. This also puts distillate prices nearly 75 cents higher than they were at their December lows, and the charts suggest there’s plenty of room to move higher still with a run at $3.70 or even $4 looking likely in the next several weeks.  

The gasoline price rally isn’t quite as impressive, with RBOB futures “only” rising 43 cents off of their January lows, and 64 cents since bottoming out in December. Considering that we’re just moving through the worst few weeks of the whole year for gasoline demand however, that rally is still an impressive feat, leaving the door open for a run at $2.80 or $3 over the next month. While the charts are now favoring higher prices, numerous technical indicators are flashing “overbought” status, meaning a sharp pullback is to be expected along the way and could happen this week. As long as the upward trend-lines aren’t broken, that pullback should be a decent buying opportunity.   

The squeeze is on. Money managers made substantial increases in the net length held in energy contracts last week, driven in large part by a big reduction in short positions for WTI and Brent as the price rally marched on. In total, more than 45,000 short contracts were covered as the big speculators that had been betting on lower prices threw in the towel.  For Brent, speculative length has reached a 4 month high, and will hit a year high next week if the recent upward trend can hold. 

We have seen large increases in open interest so far in 2023 as lower volatility seems to be encouraging some traders to dip their toes back in the water, but the overall positions remain low compared to the past 5-7 years.

Baker Hughes reported a large decline in oil rigs last week, with the total US count dropping by 10, bringing it to a 2 month low at 613. Natural gas rigs meanwhile saw a large increase of 6 on the week, bringing that weekly total to 156. Given the long lead times needed to get enough people, equipment, and sometimes funding in place for a drilling rig, it seems the current drop in oil rigs may be a reflection of the market pessimism 2 months ago when WTI traded down to the $70 mark, or it could be a sign of shifting to favor natural gas production as the world was expecting a harsh winter heating season that simply has not yet materialized.

A fire broke out at the PBF refinery outside of New Orleans Saturday, but was quickly extinguished without any injuries. So far there are no reports on whether or not operations have been curtailed following that fire. 

Today’s interesting read from the WSJ: A debate over whether or not blending more biofuels will benefit the environment. 

Protesting unions in France are threatening to cut off electricity supplies and shut down refineries, as the country continues to struggle with either making people work 2 more years before getting their state pension or going bankrupt.  Those protests continue to offer a reason for buyers to bid up refined product futures as the Atlantic basin is stretched thin for refinery output already.

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