ULSD Prices Drop Despite Looming Russian Supply Ban

ULSD continues to lead the energy complex lower as January winds to a close, dropping from a high of $3.58 one week ago to a low of $3.0570 this morning. Crude oil and gasoline prices have also come under heavy pressure, but have lagged far behind the moves in ULSD, which has pushed prompt diesel crack spreads by down by $12/barrel in just a week.

Why exactly diesel prices got so weak so fast is a bit of a mystery given that inventories remain well below their seasonal ranges, refineries across the country are running below normal levels due to a rash of unplanned issues, and the embargo on Russian diesel shipments starts this weekend. 

The warmer than expected winter has certainly eased concerns of more severe shortages of natural gas and heating oil across Europe and the US North East, but European natural gas prices have been rebounding as temperatures are expected to drop again next week, and French workers are attempting to block more fuel deliveries today as part of the ongoing strikes against state pension reform. 

Recession expectations could be a factor in this pullback, as they were during the last 2022 selloff as earnings season is showing that US consumers are slowing down purchases, while the FED is poised for another rate hike tomorrow.   

Liquidations by the hedge funds that added new bets on higher prices last week, just in time for this pullback could also be at play, although we won’t get to see that data again until Friday. 

The drop could be a sign of the classic “buy the rumor, sell the news” trading phenomenon with the upcoming Russian embargo, particularly given that exports have surged in recent weeks as buyers race to beat the deadline. 

There’s also a real possibility that there simply is not a fundamental reason at all for this price pullback, and it has more to do with the big speculative funds that can be the fair weather fans of commodity markets, or the trading algorithms that account for most daily volume being programmed to sell after an 82 cent rally from a low of $2.76 in early December to $3.58 last week.

Whatever the cause, ULSD is now breaking its weekly trendline that propelled prices higher for 7 weeks, and sets up a test of the January lows at $2.92 if they can’t manage a bounce in the next day or two.  Then again, if they do bounce, this 50 cent pullback in 5 trading days may be seen as nothing more than the latest big swing in an extraordinarily volatile market and a good buying opportunity for anyone that has a fuel budget.

Pretty much everyone expects the FED to raise rates by 25 basis points tomorrow, with the CME’s fedwatch tool showing a 99% probability of that outcome, and 85% that they’ll raise another 25 points in March.   The big question is whether or not the FED will be done raising rates after that, with traders fairly evenly split in their bets on the rates beyond the next two months.

Exxon, Marathon and P66 all reported earnings for Q4 today, and surprised no-one with their strong results, even though refining margins pulled back from the record levels set earlier in the year. 

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