Extreme Cold Impacts Diesel Supplies

On January 30, 2014 by TradingDesk

Yesterday’s DOE report gave a good look at the significant impact the extreme cold has been having on the country’s diesel supplies. PADD 1 (East Coast) stocks dropped by more than 11% last week, to their lowest levels in 6 years, as demand for heat outpaced traditional generation methods and ULSD found itself becoming the supplemental source of supply. Nationwide demand for distillates has increase by 50% over the past 3 weeks, the largest such spike in more than 13 years. All this information validates the price action we’ve witnessed over the past two weeks, particularly the record backwardation in ULSD spreads. Most notably, the Feb/March spread is now north of 17 cents, compared to two weeks ago when the all-time high was a 6 cent premium for the prompt contract.

The good news for US consumers is that the lack of reaction by forward prices suggests a US refined products market that remains structurally long, so when these types of events occur their impact – though dramatic – is fairly short term. As is shown in the production and net import/(Export) figures below, the US still produces over 1 million barrels/day of refined products that it does not consume, and simply backing off of exports can help to heal a supply wound more quickly than racing to find new refining capacity. The current situation does an excellent job of displaying the challenges faces by the industry trying to move ample supplies from the refining center along the gulf coast to the population center along the east coast.

As was widely expected, the FOMC reduced its monthly asset purchases to $65 billion per month yesterday, and US equities continued their January slide following the announcement. The monthly chart for the S&P 500 shows an outside down reversal bar forming for January, which – should we settle the month at current levels – suggests more selling in equities to come. The correlation between equity and energy prices has dropped significantly over the past year, but as energy prices struggle to find direction, this could be a significant factor as we head into the spring.

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