Diesel Prices Are Struggling To Find A Floor After A Huge Friday Selloff Knocked The Wind Out Of Its December Recovery Rally

Diesel prices are struggling to find a floor after a huge Friday selloff knocked the wind out of its December recovery rally. ULSD was up 5 cents overnight but has dropped to 2 cent losses in the early going, despite RBOB and WTI holding onto modest gains.

Another round of winter storms this week could negatively impact Christmas travelers, but - so far at least - aren’t stirring fears of spiking demand for heating supplies. While most of the headaches will come in the North and Eastern US, Texas is forecast to see single digit temperatures for the first time since the 2021 storm that crippled the region and knocked every refinery in the state offline for some period of time.

Money managers continue to be unenthusiastic about energy contracts, making large reductions in their net length (bets on higher prices) for ULSD, RBOB and Brent last week, while WTI and Gasoil contracts saw small increases. Open interest did increase on the week, but remains near 6 year lows as volatility and increased margin costs keep many on the sidelines. Speaking of which, take a look at the “Swap Dealer” positions for WTI in the chart below. Those positions have been shrinking steadily since January and reached their smallest level since July of 2017 last week, which suggests that domestic oil producers are hedging less and less of their future output. 

Baker Hughes reported the US oil rig count dropped by 5 last week, a 2nd straight decline in drilling activity, and perhaps yet another sign of the risk aversion by producers these days. 

The DOE announced the White House was taking credit for lowering gasoline prices Friday, as it issued a press release for a new purchase of 3 million barrels for the SPR, which amounts to just a little over 1% of the oil that’s been drawn down over the past 2 years. Whether or not this is just political theatre remains to be seen as details of the February auction have yet to be released.

As year-end approaches, we’re seeing rack prices in Texas plummet vs their spot markets as inventory holders try to minimize the impact of the state’s property tax laws that will cost 8-10 cents/gallon for anything sitting in a terminal. This annual phenomenon typically leads to some big drawdowns in oil inventories as importers will hold barrels off-shore until January to avoid paying that extra tax. The collapse of the spot/rack spreads is particularly notable in the West Texas markets, which have made their seasonal swing from famine to feast on supply along with several other major markets across the Southwest.

Corruption allegations against European and Qatari officials have taken some of the shine off of an epic World Cup finale, and Qatar is now the latest country to rattle the energy saber suggesting that the investigation could “negatively affect” security discussions, while stopping short of explicitly threatening natural gas supplies that are currently being negotiated. 

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