November ULSD Is The Lone Energy Contract Moving Higher This Morning

November ULSD is the lone energy contract moving higher this morning as backwardation for diesel prices has now reached the 2nd most extreme level on record. With just 2 trading days left for November RBOB and ULSD, most US cash markets are already trading vs the December reference months, sparing those traders from trying to keep up with the big swings in time spreads. 

The forward curve and time spread charts below tell the story of how the market is reacting to a supply squeeze on the East Coast that happens to be the delivery point for these futures contracts. While prompt ULSD values are up more than $1/gallon in the past month, diesel values 2 years and more forward have actually declined during this time. 

It’s a similar but less dramatic story for RBOB contracts, with some forward months trading lower, even though the recent squeeze in supplies along the East Coast has pushed up premiums for prompt barrels. 

Compare those changes in the forward curve to WTI and Brent which are both up fairly steady from prompt through 3 years forward and it seems that the market has started to price in some of the new refining capacity scheduled to come online (primarily in Asia and the Middle East) over the next 2 years. Speaking of which, while US Refiners are reporting banner earnings, China’s largest refiner struggled in Q3 as the country’s zero-covid policies crimped demand.

Exxon reported record earnings of nearly $20 billion in Q3, with record high North American refinery run rates, huge diesel margins and trading gains offsetting a drop in gasoline demand in their refining sector which has made almost $11 billion so far this year compared to a loss of $1.2 billion in the first 9 months of 2021. 

The NHC continues to track 2 storm systems in the Atlantic as the 2022 Hurricane season approaches its final month. The system in the Caribbean is now given 70% odds of developing, but early models suggest it will move west towards Central America rather than north towards the US. The system moving off the US East Coast is given just 20% odds of developing, but won’t help the North East with the vessel delays that contributing to various terminal outages over the past week.  

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