Weakness in Diesel Prices, Soft Demand in Focus

ULSD futures have dropped 80 cents in 9 days as the market has acted as if it’s only worried about a slowdown in demand, and not so much the lingering concerns about supply. After the January lows acted like nothing more than a speed bump this week, the next target on the charts is the December lows around $2.78, roughly 10 cents below the lows set this morning. That is about the only thing on the charts standing in the way of a drop to the $2.50 range, although we’re set up for at least a short-term bounce after this latest wave of selling.

It’s worth noting that the big physical players aren’t figuratively buying the selling in futures, and are instead literally buying up prompt barrels, and keeping cash prices for distillates above their January lows so far. The relaxation of backwardation seems to be playing a part in the stronger basis differentials in the front of the curve, and markets in the Midwest that had been trading 40-50 cents below futures during the winter doldrums are now only seeing single digit discounts. 

A record-setting cold snap in the Northeast US would typically be cause for at least a brief jump in diesel futures, but the severe weather forecast this weekend is apparently seen as too little, too late, and too short to offset the much warmer than normal winter that has curbed heating demand and alleviated so many concerns about another supply crunch last fall. That doesn’t mean this storm won’t come without challenges, as vessel delays, freezing equipment and power outages are all still a possibility, but since temps will be back in the 40s by Sunday, that may be an afterthought by Monday morning.

The January payroll report smashed most expectations, with more than 517,000 jobs added during the month. That good news for the economy could end up being bad news for markets that had rallied the past couple of days in hopes that the FED might take it easy on the tightening. 

Click here to download a PDF of today's TACenergy Market Talk.