ULSD Futures Leveling Out After Wave Of Selling Following Bearish Inventory Data

Reversal Thursday rules are in effect as energy contracts tick modestly lower following three days of strong gains for gasoline and crude oil contracts. ULSD futures are once again resisting the pull of their counterparts, hovering near break even after a wave of selling following some bearish inventory data from both the API and DOE over the past 2 days.
Today is expiration day for the August RBOB and ULSD futures contracts. The recent rally in RBOB has been driven in large part by stronger calendar spreads, so when the September contract takes the prompt position tomorrow it will start out some 6 cents below where values are today, suggesting the recent rally has more to do with short term supply concerns than a long-term shortage. That backwardation also helps explain why prices to lease space on Colonial’s line 1 have barely flinched even though the spread between NYH and USGC RBOB just hit its highest level of the year. In short, by the time you could actually ship those barrels north, the spread will be less than half of what it is today.
The tariff train continues: Wednesday the White House announced new tariffs on Brazil, but exempted energy products from that order along with other strategic goods like Brazil nuts and Frozen Concentrated Orange Juice.
Perhaps the biggest surprise in the latest wave of tariff proclamations was a new tariff levied on U.S. Copper imports. That news seemed to catch the copper market by surprise as prices have plummeted by 22% since the announcement. If you’re a subscriber to the “Dr Copper” theory because the metal acts like it has a PHD in economics, the rapid price plunge certainly sends an ominous signal for U.S. economic activity.
In addition to the tariff announcements, the U.S. Treasury levied its largest Iran-related sanctions package since 2018, targeting more than 50 individuals and more than 50 vessels that are part of a network skirting sanctions against both Iran and Russia.
As expected, the FOMC held rates steady in yesterday’s announcement, but the committee had a highly unusual dissent from 2 governors, which hasn’t happened in more than 30 years. Those two governors were both appointed by President Trump and were both in favor of a 25 point reduction in the target rate. The CME’s Fedwatch tool shows that prior to the announcement more than 60% of bettors on Fed Fund futures expected a rate cut in September, but today that probability has dropped to 39%.
There’s a risk of flash flooding across the major metro areas along the U.S. East Coast today that is expected to create “significant” travel disruptions along the I95 corridor according to AccuWeather forecasts.
Grasping at straws: A new proposed bill from California’s governor has been leaked that includes provisions to boost oil production in the state as part of wider efforts to backtrack on previous policies to end fossil fuel use in the state. This comes on top of the state’s long shot efforts to find a buyer for Valero’s Benicia refinery.
Notes from the DOE’s weekly status report. See charts attached.
Lower exports led to nearly an 8mm barrel build in crude stocks. Most of that increase was in PADD 3 where stocks climbed back to ’23 & ’24 seasonal levels after spending the past 9 weeks running well below those figures and the bottom end of the 5-year range. Refinery run changes were tame across all PADDs and remain at elevated levels in total, holding the utilization rate in the 95% range week to week.
Diesel stocks added 3.6mm barrels, 70% of which came from a bump in PADD 3. PADD 1 was little changed despite the bulk of last week’s imports hitting the East Coast. PADD 5 climbed back into range at close to 2023 levels after running at 5-year seasonal lows since April; however, still about 3mm barrels shy of where we started out this year. Demand did pick up, holding the inventory increase in check, but is still at a seasonal 5-year low.
Gasoline stocks moved the other direction with big drops in PADDs 1 & 5, as exports and demand picked up. PADD 5’s decline was on the heels of a fairly steady run up since mid-April, so inventories are still holding about 1mm barrels above average. PADD 3 is comfortably above average as well but declines in PADDs 1 & 2 pulled total inventories just below their 5-year average as PADD 1 & 2 make up about 25% and 20%, respectively, of the U.S. total.
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Diesel Prices Dive On Inventory Surge As Markets Eye Sanctions And Fed Outlook
