Hedging ULSD for Winter, 2017 – 2018 Up in the Air

  1. December 2017 ULSD trades near recent highs
  2. December ULSD typically bought in preceding February
  3. ULSD prices face contradictory signals: OPEC cuts crude oil, U.S. crude oil output growing​
  4. Natural gas turning bearish; support at $3.097 breaks


Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse

The Matrix

West Texas Intermediate (WTI) crude oil prices have been trading in a flat pattern since December, ranging between $50.50 and $55.25. The loss of volatility and the current price level has left traditional ideas of dealing with late-winter market conditions unresolved. Typically, buyers of distillate fuel oil use the first two months of the year to establish length.

This worked very well last year, for example. December distillate fuel oil (HO) bottomed at $1.05 during the week ending January 21, 2016. December HO expired in November around $1.58. Currently, however, December 2017 is trading around $1.72.



Some commercial buyers have resisted acquiring length for December 2017, because December 2017 is priced over recent highs. A decision to defer buying, however, is not a slam dunk.

Watch the calendar, not the price level. Product pricing reflects seasonal imperatives and balances of supply and demand. Price levels do not set price limits; there is no price too high or too low for distillate fuel oils to achieve. And with prices currently around $1.60, there is substantial room for further new highs, even though revisiting recent lows has been a focus of trade interest.

Decision making has taken on an air of uncertainty, reflecting conflicting claims on the effectiveness of the OPEC-non-OPEC exporter agreement, potential significant changes in the U.S. tax regime and untested reactions of American shale oil producers to a successful OPEC agreement.

The agreement exporters claim a crude oil output reduction of just over 950,000 barrels daily in January. This is nearly 20% fewer barrels than agreed. Moreover, the source of most of the cut was Saudi Arabia. The Kingdom committed to a January production cut of 486,000 barrels daily. In fact, it cut 564,000 barrels per day. In other words, Saudi Arabia has accounted for nearly 60% of the reduction. Thin compliance beyond Gulf OPEC is not surprising; it has historically been par for the course: Saudi Arabia cuts, other OPEC seeks to fill the void.

Complicating the analysis is the unexpectedly rapid return of U.S. shale production. OPEC assumed U.S. output would run around 8.4 million barrels per day. In fact, U.S. production has recovered substantially, reaching 8.9 million barrels daily during the latest report week.

Supply/Demand Balances

Supply/demand data in the United States for the week ending January 27, 2017, were released by the U.S. Energy Information Administration (EIA).



Total commercial stocks of petroleum increased 5.3 million barrels during the week ending January 27, 2017.

Builds were reported in stocks of gasoline, fuel ethanol, distillates and other oils. There were draws in stocks of K-jet fuel, residual fuel and propane.

Commercial crude oil supplies in the United States grew to 494.8 million barrels, an increase of 6.5 million barrels.

Crude oil supplies increased in two of the five PAD Districts. PADD 3 (Gulf Coast) crude oil stocks expanded 8.5 million barrels, and PADD 4 (Rockies) stocks grew 0.4 million barrels. PADD 1 (East Coast) crude oil stocks decreased 0.9 million barrels and PADD 5 (West Coast) stocks declined 1.5 million barrels. PAD District 2 (Midwest) stock were unchanged from the previous report week.

Cushing, Oklahoma, inventories decreased 1.3 million barrels from the previous report week to 64.1 million barrels.

Domestic crude oil production decreased 46,000 barrels daily to 8.915 million barrels per day.

Crude oil imports averaged 8.290 million barrels per day, a daily increase of 480,000 million barrels. Exports fell 50,000 barrels daily to 549,000 barrels per day.

Refineries used 88.2% of capacity, a decrease of 0.1 percentage points from the previous report week.

Crude oil inputs to refineries decreased 100,000 barrels daily. There were 15.947 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 10,000 barrels daily to 16.302 million barrels daily.

Total petroleum product inventories saw a decrease of 1.2 million barrels from the previous report week.

Gasoline stocks expanded 3.9 million barrels; total stocks are 257.1 million barrels.

Demand for gasoline increased 271,000 barrels per day to 8.310 million barrels daily.

Total product demand increased 669,000 barrels daily to 19.307 million barrels per day.

Distillate fuel oil supply increased 1.6 million barrels; total stocks are 170.7 million barrels. National distillate demand was reported at 3.809 million barrels per day during the report week. This was a weekly increase of 164,000 barrels daily.

Propane stocks fell 5.6 million barrels to 62.6 million barrels. Current demand is estimated at 1.453 million barrels per day, an increase of 69,000 barrels daily from the previous report week.

Natural Gas

According to the EIA:

Unseasonably mild weather leads to another relatively modest net withdrawal. For the second week in a row, considerably warmer-than-normal temperatures resulted in net withdrawals falling below the five-year average. Net withdrawals from storage totaled 87 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 166 Bcf and last year’s net withdrawals of 169 Bcf during the same week.

Warmer-than-normal temperatures throughout most of the Lower 48 states mitigated heating demand for natural gas and contributed to the below-average withdrawals from storage. Working gas stocks totaled 2,711 Bcf, which is 59 Bcf more than the five-year average and 266 Bcf less than last year at this time.

The year is now in the second half of winter. Heating degree days (HDDs), the principal drivers of changes in winter natural gas prices, have not been supportive. The Climate Prediction Center shows HDDs lagging both last year and the long-term normal for the United States (the nation lags normal HDDs by 471 for the year starting July 1, 2016).



The inability of prices to move higher is bearish. The natural gas price chart is developing bearish characteristics. In recent weeks, prices have traced out a rectangle 41.6 cents wide. If the bottom of that pattern breaks, an objective of $2.681 can be projected.



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