Analysis: ULSD Rallies in January Triggered by Perfect Storm


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- The front-month ULSD futures contract traded on the New York 
Mercantile Exchange recorded its largest monthly rally in more than three years 
in January, driven by a perfect storm of inclement weather, rising crude prices 
and low inventories.

   Front-month ULSD futures surged 28% in January, virtually matching the 
October 2022 run-up of 28.4%.   

   The rally came on the back of the Winter Storm Fern in January, which also 
elevated to multi-year highs the premium for front-month ULSD contracts over 
those meant for later delivery. The price spike was triggered by an Arctic 
blast from the East Coast to Midwest and South that blew past cold forecasts, 
catapulting in massive heating demand that drew down distillate stocks.

   Backwardation has eased since, as nationwide diesel stocks recovered to near 
long-term averages. But historically low inventories on the U.S. East Coast are 
setting the stage for another potential weather-induced price spike.

   Distillate fuel oil inventories started the year close to 4% below the 
five-year average and nearly 10% below the ten-year average, according to U.S. 
Energy Information Administration data. 

   At the same time, domestic demand was close to long term averages, while 
internationally short supply pulled more distillate barrels on the export 
market than in past years.

   Additional price support came from a 14% crude oil rally in January as fears 
of a U.S. military attack on OPEC's fourth-largest producer Iran led to an 
increase in supply risks.

   The combination of these factors set the stage for wild price swings in the 
event of a supply outage or a demand spike.

   While the impact to refining was rather negligible, distillate fuel oil 
demand rocketed in the wake of January 23-27 Winter Storm Fern. 

   The storm hit the U.S. East Coast hardest, where heating oil remains a key 
heating fuel and inventories were at their lowest seasonal level among the five 
PADDs.

   Consequently, ULSD's prompt spread shot up to $0.247 gallon, the highest in 
more than three years, and the six-month spread reached a 28-month high of 
$0.465 gallon. The front-month ULSD contract climbed to a 21-month high, 
surpassing the rally in late October and early November after a European Union 
(EU) proposal to ban imports of fuels made from Russian crude. That EU move 
coincided with historically tight distillate stocks on the continent after a 
global refining lull.

   ULSD calendar spreads are back now to the mid-January point as nationwide 
distillate fuel oil inventories return to long-term averages and above year-ago 
levels.

   The situation on the U.S. East Coast, however, remains more precarious than 
elsewhere. PADD 1 distillate fuel oil stocks fell 3.2 million bbl in the week 
of the winter storm, down 9.3%, and are now close to 16% below the five-year 
average. DTN's weather forecast sees colder-than-usual temperatures along the 
entire East Coast in the days ahead -- enough to lift demand, but well short of 
carrying the potential for a repeat of the recent price spike. 

   Still, inventories are likely to continue their decline as U.S. refiners 
enter seasonal maintenance, leaving energy markets vulnerable to another rally 
driven by weather-induced demand surges or supply outages.

    




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