ULSD Price Curve Suggests Bullishness in 2021 

  1. ULSD futures curve turning bullish
  2. Strength responds to new Covid vaccines
  3. Global supply/demand shifting
  4. Natural gas outlook softens

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Alan Levine—Chairman, Powerhouse
(202) 333-5380


The Matrix

ULSD contracts (symbol HO) for January 2021 are set to expire in about a week-and-a-half on December 31, 2020. (I’m writing on December 20.) This will conclude one of the most challenging years ever experienced since the 1978 introduction of the HO futures contract—and there have been many of them.

A clue to ULSD pricing as we enter 2021 might be found in the action of HO futures. As the week of December 18 ended, the first five months of ULSD futures all settled within 10 ticks of each other. This may be significant in that it represents a price pattern that has now eliminated a carry price pattern. If the rally in ULSD prices continues, the market will become backwardated.

Backwardated prices are bullish. Paying more for ULSD now, before carrying charges are incurred, occurs because buyers anticipate less ULSD availability in the near term.

Another indicator of strength in ULSD can be seen in the chart above. In the past eleven years, HO prices have, on average, topped late in October or in November. December usually introduces a decline that continues in the first quarter. A significant decline has not occurred since the Covid-induced sell-off in April and May.

This year, HO futures have rallied since the start of November with little pause. Optimism has ignored the potential impact of a dark Covid winter. Along with newly approved vaccines, added upside strength should be part of the industry’ planning going forward.

This year was unique because of the Covid-19 pandemic, an overlay to shifts in global use of petroleum. China in particular has become a bigger player in petroleum liquids, while the United States has struggled to maintain its own level of consumption.

Total U.S. product demand reached its low around April 10, 2020 at 13.8 million barrels daily. It has since recovered to 19.3 million barrels per day in the week ending December 11.

Jet fuel was particularly damaged. At its week-ending May 8 low, jet demand was put at 352,000 barrels daily. It has recovered to 1.149 million barrels daily most recently. Even so, demand still lags last year’s use by about one-third.

One response to the Covid economic slowdown has been working from home. One uncertainty is the extent to which declines in business travel could permanently impede demand for jet fuel. EIA projects jet fuel consumption to average 1.5 million barrels per day in 2021, about 12 percent lower than its 2019 average.


Supply/Demand Balances

Supply/demand data in the United States for the week ended December 11, 2020, were released by the Energy Information Administration.

Total commercial stocks of petroleum fell by 6.2 million barrels during the week ended December 11, 2020.

Commercial crude oil supplies in the United States decreased by 3.1 million barrels from the previous report week to 500.1 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Plus 1.0 million barrels to 11.6 million barrels
PADD 2: Down 0.3 million barrels to 146.4 million barrels
PADD 3: Down 3.0 million barrels to 271.0 million barrels
PADD 4: Plus 0.3 million barrels to 24.5 million barrels
PADD 5: Down 1.1 million barrels to 46.7 million barrels

Cushing, Oklahoma inventories were up by 0.2 million barrels from the previous report week to 58.4 million barrels.

Domestic crude oil production fell 100,000 barrels per day from the previous report week to 11.0 million barrels daily.
Crude oil imports averaged 5.424 million barrels per day, a daily decrease of 1.055 million barrels. Exports increased 793,000 barrels daily to 2.627 million barrels per day.

Refineries used 79.1% of capacity, down 0.8% from the previous report week.

Crude oil inputs to refineries decreased 253,000 barrels daily; there were 14.183 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 148,000 barrels daily to 14.544 million barrels daily.

Total petroleum product inventories rose 3.1 million barrels from the previous report week.

Gasoline stocks increased 1.0 million barrels daily from the previous report week; total stocks are 238.9 million barrels.

Demand for gasoline rose 375,000 barrels per day to 7.975 million barrels per day.

Total product demand increased 801,000 barrels daily to 19.335 million barrels per day.

Distillate fuel oil stocks increased 0.2 million barrels from the previous report week; distillate stocks are at 151.3 million barrels. EIA reported national distillate demand at 4.002 million barrels per day during the report week, an increase of 613,000 barrels daily.

Propane stocks decreased 3.7 million barrels from the previous report week; propane stocks are 83.9 million barrels. The report estimated current demand at 1.671 million barrels per day, a decrease of 20,000 barrels daily from the previous report week.


Natural Gas

Spot natural gas futures have traced a small-range pattern in the past several days. Traders typically expect natural gas prices to soften around year-end. EIA has cut its price forecast. The agency is now expecting a 2021 natural gas price to average $3.01. This is a decline of 4.1% from its last projection.

According to the EIA:

Net [natural gas] withdrawals from storage totaled 122 Bcf for the week ending December 11, compared with the five-year (2015–19) average net withdrawals of 105 Bcf and last year’s net withdrawals of 97 Bcf during the same week. Working natural gas stocks totaled 3,726 Bcf, which is 243 Bcf more than the five-year average and 284 Bcf more than last year at this time.


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