Bubble in Prompt-Month ULSD Futures Bursts

On February 24, 2014 by TradingDesk

The bubble in prompt-month ULSD futures burst on Friday, sending the March contract down by 8 cents on the day, although it was still up 2 cents for the week. Although the selling was impressive, most of the losses were due to a collapse in time-spreads, and the bullish trend in place since the onslaught of winter weather began in January remains in place. The April contract, which will take over the prompt position next week, is still well above the pivotal $3 mark, and will take much of the focus this week. If $3 holds, look for more upside over the next few weeks.

RBOB had a more modest sell-off Friday, and also finished with 2 cent gains for the week. The contract is showing signs of a rounding top on the charts, which could be a bearish signal, but the lower-rvp April contract did settle above $3, which suggests the spring rally is still alive and well.

Investment funds poured into energy futures and options early last week, the largest increase in such positions since 2011 according to the CFTC, with each of the 4 major petroleum contracts showing substantial increases in their net long bias for this class of trader. What is interesting is that the net long position in refined products remains within historical levels, while WTI positions continue to break record highs. This could mean further upside for products, even if crude prices stall out, but it also leaves the entire complex vulnerable to a sell-off should the hot money head for the exits.

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