ULSD Futures Are Continuing To Lead The Charge This Morning, Rallying Nearly 10 Cents At Their Highest Point Of The Day So Far

Market TalkFri, Jan 12, 2024
ULSD Futures Are Continuing To Lead The Charge This Morning, Rallying Nearly 10 Cents At Their Highest Point Of The Day So Far

Energy prices are surging Friday after the US and UK conducted airstrikes on at least 16 locations in Yemen overnight targeting Houthi rebel assets that have been attacking ships in the Red Sea. Following the attacks, the Combined Maritime Forces group working to secure the shipping lanes in the region requested all ships to avoid the Bab Al Mandab strait, which essentially shuts off transit through the Red Sea and Suez Canal for several days, signaling that there are more attacks planned.

Perhaps just as noteworthy as the price rally this week, is the fact that we’re still seeing oil prices at or below $80/barrel, and retail gasoline prices around $3 or less across most of the country. That relative lack of reaction to escalating violence in the world’s key energy production region which is a testament to how increased supply from the US is acting as a buffer to the global market. For those that worked in the industry 12-15 years ago, just imagine what events like this would have done to prices back then. 

ULSD futures are continuing to lead the charge this morning, rallying nearly 10 cents at their highest point of the day so far, and coming just about a penny shy of closing the chart gap at $2.80 that’s been the short term technical target this week. If prices can break above $2.80 there’s a good chance, we see a run towards $2.95 in the near future as the contract completes its W pattern. RBOB futures have hit their highest level of the new year but are facing some resistance around the $2.20 mark. A break above that level suggests another 10 cents of upside in short order, but the chart indicators remain less supportive of gasoline than they do diesel prices, consistent with their seasonal norms. 

Speaking of seasonal patterns, it’s mid-January and blizzard warnings are covering large parts of the country. A severe cold snap following this latest storm has many concerned that we could see a repeat of 2021’s disastrous polar plunge that ended up causing the most severe refinery disruption in history. Unlike that storm that knocked every single refinery in Texas offline, the average low temperature across the state is expected to remain in double digits and will only last 2-3 days so the electric grid failure is less likely this time around. Refinery row along the Gulf Coast looks like it will be spared the worst of this cold weather although lows in the 20s from Corpus Christi to Houston will have some operators holding their breath. Several inland Texas refineries like the Valero and P66 facilities in the Panhandle and Delek’s Big Spring and Tyler plants all look particularly vulnerable as some forecasts suggest record low temperatures could hit the northern parts of the state. 

Midcontinent refiners are more used to dealing with the cold temps, but lows near zero in Oklahoma and double-digit negatives from Kansas through the Chicago region will no doubt cause some operational issues. The East Coast has already seen one of its refineries shut down due to the winter storms this week and will have to deal with more severe threats as this storm passes. The major population centers along the coast aren’t forecasted to get the extreme cold after the storm passes like other parts of the country so the chaos of curtailments in natural gas supplies that would cause a run on the tight diesel supplies in the region should be limited. 

Of course, it’s not just the supply network at risk from these storms. This weather has already put a dent in fuel demand as vehicles are forced off the roads in some areas, and many more have or will choose to just stay home for several days. That impact, unlike a major hurricane that hits coastal refineries but leaves the rest of the country open for business, should dampen the impact on fuel prices.

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ULSD Futures Are Continuing To Lead The Charge This Morning, Rallying Nearly 10 Cents At Their Highest Point Of The Day So Far