On one hand, the ULSD market has the tightest inventories versus a year ago of the entire petroleum complex, but on the other, the spec and fund net long is the largest of the actively traded energy contracts. The ULSD market is facing sluggish demand from air travel, but that might be offset by surging US trucking demand. With the holiday shopping season approaching and the US Administration implementing assistance plans and fines to get ports moving again, we would expect shipping demand for diesel trucks to ramp up. In short, we expect ULSD demand to rise moderately in the coming two months, with the demand for jet fuel picking up around Thanksgiving and clawing higher through the end of the year. A signal of improving demand for ULSD could be if the weekly implied distillate demand reading comes in consistently above 4.3 million barrels per day.
We continue to see the current US refinery operating rate as insufficient to rebuild product inventories. This past week’s EIA report showed a year over year diesel stocks deficit of 30.8 million barrels. The US refinery operating rate continues to come in nearly 15% below capacity. After a significant flare-up in crack margins in in late September and early October, profitability has fallen back into the range seen from May through mid-September. This could discourage additional refining activity.
The diesel market is overbought from a spec and fund positioning perspective, but the market’s recent correction should have balanced that position slightly. Heating demand should see a sharp increase in the coming weeks, and trucking and holiday travel should begin to ramp up as well, and this could widen the diesel and distillate stocks deficits.
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Originally Published on October 29, 2021
Charts Source: EIA
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