ULSD Is Showing Off Once Again, Rallying A Nickel Overnight To A Fresh 7 Year High

ULSD is showing off once again, rallying a nickel overnight to a fresh 7 year high in what would be its record setting 12th consecutive day of gains. The rally has cooled a bit in the early morning hours, with prices only up 2.5 cents as of 7:30 central. While the contract may soon outkick its coverage and see a large pullback in prices, there’s a growing concern that a number of factors could cause an even larger spike before cooler heads prevail and prices begin to cool. 

The forward curve charts below show how futures prices are moving into a steep backwardation, which simultaneously leaves the market susceptible to an even larger spike in paper prices, even while physical markets are seeing heavy selling in basis values as most US regions don’t face the same near term supply crunch, and in many cases are seeing just the opposite today. 

The strength in time spreads is consistent with a market concerned over a near-term supply crunch, which is currently being fueled by the ongoing saber rattling on either side of the Ukraine, along with attacks on a UAE oil facility on Monday. Back to back winter storms in the US that are causing a spike in supplemental heating demand are also factoring into the short term supply concerns on the East Coast, even though most of the country is swimming in excess inventory.

The good news for refiners is this latest rally has boosted crack spreads all along the curve, and with RIN values coming under pressure over the past week will also help their margins, assuming of course that the weakness in local rack markets across large parts of the country that we’re seeing eventually goes away as we move towards spring.

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