The ultra-low sulfur diesel crack spread cracked up, hitting a new record high, as physical buyers are scrambling to secure supply. I have talked to many of my physical players, and there are reports that some parts of the country are unable to get diesel supply.
Panic buying is starting to happen as some dealers ration supply. Other dealers seem to be ok. Ken Williams of Scott Williams incorporated, a retail heating oil distributor in Boston, says that:
“In my market area, which is South of Boston, more than adequate have no concerns at all.”
He is supplied by Citgo terminal, and they tell him for now, it’s good. No need to worry now, but other dealers are not having that same calm to their fears. Another dealer said that he’s hearing that there are spot shortages of heating oil and diesel in places like Virginia.
Bloomberg News reported last week that the U.S. Northeast is so short on heating oil that the fuel used to power home furnaces is being rationed even before the start of winter. Some wholesalers in Connecticut are putting retailers on allocation, meaning they can only get a limited amount of fuel based on availability, according to Chris Herb, president of the Connecticut Energy Marketers Association, which represents around 600 family-owned retailers in the state. These retailers must, in turn, ration their customers.
These stories, along with the fact that the demand cover for distillate fuels is only 25 days, have buyers driving up the crack spread, and we saw a big explosion to the upside. With the crack spread being high, oil, at some point, will have to follow.
Oil is getting a boost from the fact that China seems to be lifting some COVID restrictions, along with the fact that Europe is going to put on a price cap that’s going to make prices ultimately go higher. Reuters reported that the Group of Seven rich nations and Australia have agreed to set a fixed price when they finalize a price cap on Russian oil later this month rather than adopting a floating rate, sources said on Thursday.
U.S. officials and G7 countries have been in intense negotiations in recent weeks over the unprecedented plan to put a price cap on sea-borne oil shipments which is scheduled to take effect on Dec. 5 – to ensure E.U. and U.S. sanctions aimed at limiting Moscow’s ability to fund its invasion of Ukraine do not throttle the global oil market.
The market is clear that this price cap will probably do more to restrict supply than it will hurt Russian oil interests. Price caps will create shortages in the market. We’re seeing that being reflected in the upward surge.
Oil prices are now above the Bollinger band on the daily chart, and this suggests that if we close up above this area, we still have a significant upside to go. The crack spreads are pulling back from a record high in heating oil, and the gasoline crack spreads look very bullish. Obviously, as we get closer to winter, the upside risks for prices will continue to rise. This is why we’ve been suggesting to be hedged against upside risk, and it’s clear that those hedges are starting to pay off.
Natural gas pulled back after a weekly report that was rather bearish based on expectations. Yet today is turning higher. Weather reports suggest winter is a lot closer than many people want to acknowledge. The EIA reported that working gas in storage was 3,501 Bcf as of Friday, Oct. 28, 2022, according to EIA estimates.
This represents a net increase of 107 Bcf from the previous week. Stocks were 101 Bcf less than last year at this time and 135 Bcf below the five-year average of 3,636 Bcf. At 3,501 Bcf, the total working gas is within the five-year historical range.
Even though we’ve seen some pretty good increases in supplies over recent weeks, the switch to cold weather and reopening of the LNG export terminals could make those markets look very bullish. Use the weakness to put on bullish strategies going into winter.