ULSD Futures Now Up 13 Cents From The 1 Year Low Reached Last Tuesday

The recovery rally continues in energy markets to start the new week with ULSD futures now up 13 cents from the 1 year low reached last Tuesday, while RBOB futures are up 11 cents. There isn’t much in the way of fundamental news to explain the rally so far, but it may be a sign that big funds picked the wrong time to jump on the seller’s bandwagon.

Short squeeze coming? Most energy contracts saw a big influx of speculative short bets as of last Tuesday, right when prices were trading at multi-month lows and right before they bounced in the back half of the week. In total more than 114,000 new short contracts were added by money managers in the big 5 petroleum futures last week, with Brent crude accounting for roughly half of that total, pushing their total short position to a 7 year high, just 5,000 contracts below the all-time record. For ULSD, the short positions have reached their highest levels since the COVID lockdowns when prices were selling for less than $1. Since these contracts all rallied since the report was compiled, most of those positions are underwater, and if those speculators are forced to cover, there is often a snowball effect that could push prices sharply higher near term.

Baker Hughes reported a decline of 4 oil rigs and 2 natural gas rigs drilling in the US last week. The latest weekly decline brings the total to 101 total fewer rigs active now than we saw this time last year, with the natural gas rig count down 27% while oil rigs are down 11%.

Friday the White House unveiled new rules for vehicle emissions that call for increased fuel economy of 2% per year from 2027 to 2031, which is less strict than a proposal floated last year, and seem to be acknowledging the physical realities that automakers have been warning about for years. It’s also worth noting that these new rules aren’t the EPA’s guidelines, which makes the whole process even more confusing.

The EIA this morning highlighted areas of the country at risk for energy shortfalls during extreme summer conditions, with most of the Southwest and Midwest included as “elevated risks” in those projections, but no states are listed as high risks. Tomorrow morning we’ll get a look at the agencies latest monthly energy outlook.

Exxon’s Baytown TX refinery reported an upset at a crude unit over the weekend. That facility is undergoing planned maintenance already, so the upset doesn’t seem like it will have a notable impact on gulf coast basis values.

Meanwhile, Lyondell’s Houston Refining plant reported an upset Sunday. That facility was scheduled to shut down at the end of 2023, but pushed that date back a year when margins recovered. No word yet if they’ve changed their timeline again, but given that margins are back to 2021 levels, there’s much less economic incentive to continue to operate the facility as a traditional refinery, with reports that its considering chasing tax incentives to produce hydrogen and perhaps renewable diesel in the future.

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