ULSD Futures Broke Above $3/Gallon Monday, For The First Time Since February 1st

ULSD futures broke above $3/gallon Monday, for the first time since February 1st and buyers have followed through the overnight session pushing the newly prompt September contract up another nickel to start the day.  

This would mark an 11th consecutive day of gains for the prompt ULSD contract as long as prices don’t collapse, but a sharp pullback later this week seems likely given the flashing “overbought” indicators on the daily charts after prices have rallied just under 50 cents/gallon in that span.  One major difference from a year ago (besides being impressed by a 50 cent diesel move in 2 weeks, not a day) is that the strength in ULSD is not coming on the back of stronger natural gas prices in either the US or European markets, so it’s hard to argue that this recent run-up has anything to do with expectations for the winter heating season, which is often a reason for distillates to rally into the fall.  (See charts below)

Gasoline prices are lagging distillates, trading down 1.5 cents after a failed rally attempt overnight, as seasonal realities start to set in with the September contract starting out well below August, and being the last summer-grade contract of the year. Currently October futures are trading 27 cents below September, as relatively tight low RVP supplies are set to turn into ample winter inventory. Even though RBOB futures are trading 19 cents below the high set Friday, they’re still holding above the trend line that’s carried them on a 50+ cent rally since July 4th, so there is still a chance that we could see $3 gasoline futures before the summer comes to an end.  

Perhaps more important than the seasonal factors in refined product prices at the moment is the direction of the US stock market, as energy prices have had a stronger correlation to equities over the past month than they have over the past few years.  

Ethanol prices continue to slide this week, on the backs of weaker corn prices that are hovering near 2-year lows. The soft ethanol market seems to be spilling over into RIN prices, with D6 values dipping below the $1.50 mark for the first time in a month on Monday.

The Dallas FED’s Texas manufacturing survey showed declining activity for a 3rd consecutive month in July, the first such stretch since the COVID lockdowns more than 3 years ago. Prior to that you have to go back to 2015 following the oil price crash to see a stretch of declines this long. There’s no doubt that the slowdown in drilling activity reported for most of the year has contributed to this slowdown, but there’s plenty of doubt on whether or not that will drive the recovery now that prices are back north of $80 as producers still seem more focused on dividends than new investment.

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