Heating Oil Condor -Feb/March vs April/May

The EIA wrote in their monthly STEO this month : "We estimate that U.S. households that use heating oil for space heating will consume an average of? 4% more than last winter, but we expect heating oil prices will be lower this winter, averaging $3.50/gal, down 9% from last winter." They added :" U.S. distillate consumption has generally been lower so far this year." Yet, in the latest DOE data, distillate demand for the week was seen running at a pace of 4.031 MMBPD, up from that seen? in the same week in 2023 of 3.670 MMBPD, but running behind a very strong demand figure seen in 2022 of 4.370 MMBPD.

Today the AAA said that the retail diesel price at the pump in the U.S. was $3.613. This was up from the price one month ago of $3.598, but down significantly from the price seen one year ago of $4.456. The steep drop in the diesel price we see to a large degree being a result of the roughly $15 drop in the price of crude oil.

In recent weeks, U.S. and European refiners have reduced their refinery runs as they perform their autumn maintenance. This helped raise the ULSD/HO versus WTI crude oil crack spread from levels seen one month ago, and helped stabilize the Gasoil vs Brent crude crack spread. In its monthly report issued yesterday, the IEA reiterated its estimate of 240 MBPD run cuts in Europe in Q4, but noted that more run cuts are possible if margins deteriorate further. They added that "Global refined product stocks have swelled to three-year highs, pressuring margins,". In the U.S., the following commentary was seen for refinery operations after last week's DOE data :" Looking ahead, refinery operations are expected to decline in coming weeks as turnarounds pick up. Maintenance will result in around 2.7 MMBPD of refinery capacity being idled in October, Commodity Insights data showed, up from 1.3 MMBPD in September.? As of last week, refinery runs had fallen by 1.519 MMBPD since peaking over 17 MMBPD in mid-July."

Back in July, we wrote : "The condor of buying February and May versus selling March and April looks to have bottomed at a value of minus .0034, and thus support is seen for buying February and May versus selling March and selling April ULSD futures." That -.0034 price was the most recent low for the condor. At that time we pegged upside resistance for the condor at flat and then at +.0060 from a high seen in April. Two weeks ago, at the end of September, the February/March versus April/May condor peaked at +.0050, not quite reaching the April high. The price for the condor has fallen back to flat over the past 2 weeks.

We believe that the condor will be helped by several factors if they were to be seen : 1) continued lower refinery operating rates? 2) cold weather generating demand? 3) any stimulus seen as supporting Chinese demand? 4) lower U.S. interest rates5) any significant rise in geopolitical tension that would lead to much higher oil prices, that would induce speculators to buy back short positions they currently have in ULSD/HO.

Factors that could negatively impact the condor are :1) a belief that Chinese and overall global demand for distillate fuels will continue to be weak? 2) a slow start to the heating season, thus retarding demand?? 3) a ramping back up of refinery usage, thus raising supply.

Technically momentum for the condor still suggests that the February/March spread will weaken a bit more against the April/May spread, but the downside momentum is waning. We see support for buying the February/March spread against selling the April/May spread in ULSD at -.0015 and then at the low at -.0034. Upside resistance is seen for now at +.0030 and then at the recent high at +.0050.

Disclaimer

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