Do Energy Futures Have a Temporary Price Top?

  1. Possible near-term top in petroleum products
  2. ULSD Open Interest shows a bullish prospect
  3. Trendline support for HO around $1.625
  4. LNG exports could sustain a long-term rally


Al pic 2009_cropped

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


The Matrix

Petroleum product futures for March 2021 expired on Friday, February 26, on a modestly lower note. The March ULSD contract settled at $1.8431, 7 cents below the recent top. Gasoline expired at $1.887, 2.59 cents under the $1.904 high.

These tops may represent the completion of rallies stretching back to November 2, 2020. ULSD gained 84 cents, and RBOB added 94 cents over that time. Many traders seeking a bullish entry point have been frustrated by the seemingly unrelieved futures spot price advance.

April is now the spot futures month. Its behavior could provide a clue about the next support level. The ULSD chart’s steady advance allows an uptrend line to be seen, starting at the November low. A break below $1.625 could indicate the end of the rally now in play. (It could also provide a sell stop.) RBOB’s comparable support is around $1.6810.

Further evidence of when prices may have ended their bullish run could be found in an examination of Open Interest. Open Interest measures how many futures contracts exist at a particular time. The pattern of Open Interest over time could indicate the condition of the market.

Heating oil prices bottomed in early November. Open Interest in ULSD fell through the end of 2020, bottoming around 355,000 contracts. The price of heating oil was rallying as 2020 opened. Open Interest started to rally around then and added another 100,000 contracts along the way.

This is important because higher prices accompanied by expanding Open Interest can be seen as bullish. Higher prices encourage bulls to hold and add to positions. This can be seen on the chart of heating oil prices.

The bullish tenor of ULSD may have started to change in mid-February. Futures prices continued to advance, but Open Interest fell back. Fewer longs (less Open Interest) could have meant less confidence that the bullish price run would continue.

The current situation has ULSD Open Interest well below its February high, and only in the final days of March contracts did the market show substantial weakness.

Buyers of ULSD could determine how closely prices move to trendline support at $1.6250. If Open Interest is starting to expand again, a new rally in HO could be under way.


Supply/Demand Balances

Supply/demand data in the United States for the week ended February 19, 2021, were released by the Energy Information Administration.

Total commercial stocks of petroleum fell by 13.8 million barrels during the week ended February 19, 2021.

Commercial crude oil supplies in the United States increased by 1.3 million barrels from the previous report week to 463.0 million barrels.

Crude oil inventory changes by PAD District:

PADD 1: Down 1.8 million barrels to 8.4 million barrels

PADD 2: Plus 5.5 million barrels to 134.0 million barrels

PADD 3: Down 2.5 million barrels to 246.9 million barrels

PADD 4: Down 0.8 million barrels to 23.0 million barrels

PADD 5: Plus 1.8 million barrels to 50.7 million barrels

Cushing, Oklahoma, inventories were up 2.8 million barrels from the previous report week to 47.8 million barrels.

Domestic crude oil production was down 1,100,000 barrels per day from the previous report week to 9.7 million barrels daily.

Crude oil imports averaged 5.898 million barrels per day, a daily increase of 41,000 barrels. Exports increased 1.245 million barrels daily to 3.862 million barrels per day.

Refineries used 68.6% of capacity, down 14.5% from the previous report week.

Crude oil inputs to refineries decreased 2,589,000 barrels daily; there were 12.230 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 2,671,000 barrels daily to 12.615 million barrels daily.

Total petroleum product inventories fell 15.1 million barrels from the previous report week.

Gasoline stocks were UNCG from the previous report week; total stocks are 257.1 million barrels.

Demand for gasoline fell 1.2 million barrels per day to 7.207 million barrels per day.

Total product demand decreased 1.980 million barrels daily to 18.688 million barrels per day.

Distillate fuel oil stocks fell 5 million barrels from the previous report week; distillate stocks are at 152.7 million barrels. EIA reported national distillate demand at 3.932 million barrels per day during the report week, a decrease of 522,000 barrels daily.

Propane stocks decreased 5.2 million barrels from the previous report week; propane stocks are at 43.5 million barrels. The report estimated current demand at 951,000 barrels per day—a decrease of 918,000 barrels daily from the previous report week.


Natural Gas

Cold temperatures led to near-record liftings of natural gas from storage as February waned. Several natural gas statistics demonstrate the outsized influence of weather on supply. National withdrawals reached the second highest level ever recorded (338 Bcf.) The withdrawals were only 21 Bcf less than the highest reduction previously recorded during the week ended January 5, 2018.

Demand increased in every consumption sector. Residential and commercial demand averaged 62 Bcf/d. These were slightly lower than 64 Bcf/d, the highest level ever seen. Electric power produced by natural gas was higher by more than 33 Bcf/d—a new high for winter.

Natural gas production fell, reflecting freeze-offs and shut-ins.

The spot futures price did not reflect the overwhelmingly bullish activity in the economy. Prices topped at $3.298 on February 18 and moved lower in each subsequent trading session, finding a low of $2.697, 60 cents lower.

Natural gas futures appear unlikely to benefit from weather in the next few months. Out farther, demand is expected to rally as COVID-19’s danger abates. And with exports of LNG becoming a staple of global product movement, a long-running rally may be in the offing.

According to the EIA:

The net [natural gas] withdrawals from storage totaled 338 Bcf for the week ending February 19, compared with the five-year (2016–2021) average net withdrawals of 120 Bcf and last year’s net withdrawals of 145 Bcf during the same week. Working natural gas stocks totaled 1,943 Bcf, which is 161 Bcf lower than the five-year average and 298 Bcf lower than last year at this time.

The average rate of withdrawals from storage is 22% higher than the five-year average so far in the withdrawal season (November through March). If the rate of withdrawals from storage matched the five-year average of 7.5 Bcf/d for the remainder of the withdrawal season, the total inventory would be 1,645 Bcf on March 31, which is 161 Bcf lower than the five-year average of 1,806 Bcf for that time of year.


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