ULSD Futures Are Trading Up For A 4th Straight Day, which Has Finally Broken The Downward Sloping Weekly Trend-Line Since Early February

Refined products are rallying again to start the week after another round of attacks on Russian refineries over the weekend. For RBOB futures, this is the 6th straight day of increases, and prices have added 22 cents so far in that stretch and touched their highest level since September. ULSD futures are trading up for a 4th straight day, adding 15 cents in that time, which has finally broken the downward sloping weekly trend-line that had pushed prices lower since early February.

When a refinery in the US has a power outage or other unplanned disruption, it’s very challenging to get a clear read on the operational status of the facility (even sometimes for employees of that company) given the complex nature of operations and the economic stakes of that information. Once that reality sinks in, it’s easier to understand why getting a clear read on the actual impact of the drone attacks on at least 6 Russian refineries is about as easy as pronouncing their names.

The 6 refineries hit in the past week represent 1.3 million barrels of capacity, which makes up 24% of Russia’s total estimated refining capability, or just over 1% of global capacity. If even half of that output is shut for repairs as several reports suggest, it will have a meaningful impact on export flows, with countries like Brazil that had reduced US purchases in the past two years to take more disadvantaged Russian diesel the immediate losers, while USGC refiners should see a tick higher in their diesel export volumes that had stagnated of late (see charts below).

Staging for a spring rally: Confirming their bandwagon jumper status, money managers look like they’re joining in on the spring RBOB rally, now that prices have already reached 6-month highs. 1 out of 5 remaining of the large speculative short positions in RBOB contracts threw in the towel last week, while more than 4,000 new long positions were added.

HO futures saw the opposite response from money managers, who liquidated long positions and added new short bets in the US ULSD contract last week. The European diesel (gasoil) contracts, which has more than double the open interest of its US counterpart, saw a small increase in net length last week.

While open interest has recovered from the “too hot to handle” period of 2022, both the total OI for NYMEX and ICE petroleum contracts and the positions held by large speculative traders are still low compared to before the full-scale invasion of Ukraine broke out 2 years ago. Since the refinery attacks didn’t really get going until Tuesday of last week, which is also the day the CFTC collects its data for the Commitments of Traders report, these figures don’t yet include how hedge funds reacted to the attacks, but based on the price action there’s little doubt that the big speculators were piling in to refined product contracts, and now it’s just a question of how long they’ll stick around.

Baker Hughes reported an increase of 6 oil rigs and 1 natural gas rig in the US last week, pushing the total oil rig count to the highest level since September. Given the months of lead time generally needed to get new rigs active, it’s unlikely that the latest rally north of $80 was the catalyst for the rig count rising in 3 of the past 4 weeks, but it does come at an opportune time given that US production has dipped from its record high of 13.3 million barrels to 13.1 million, if you believe the EIA’s accounting problems have been fixed.