May Heating Oil vs WTI Crack

The increase in WTI futures on Monday cut the U.S. diesel crack spread to its lowest since May 2023 for a second day in a row, as per Reuters reporting.

Today the May HO versus WTI crack has rebounded after testing support yesterday at $26.10.

Six days ago we had asked the following question when we had last looked at this May Heating Oil versus May WTI crack : "Will bargain hunters look to buy into distillates given the refinery issues occurring in Russia at the same time as European refiners go into peak seasonal maintenance / turnaround?"?

We suspect that is the case today as a further drone attack was launched overnight against another Russian refinery. The latest attack hit a unit with 155 MBPD of crude refining, adding to the already sizable amount of refinery utilization lost. The amount of Russian oil refining capacity that has been taken offline due to Ukrainian drone strikes is 14% of Russia’s total refining capacity, according to Reuters calculations. Calculations show that 900 MBPD of refining capacity has been taken offline by drone strikes.

JP Morgan had estimated earlier that Russia’s refinery capacity outages could add a significant risk premium to the middle distillates market, banking on it taking weeks or even months to restore the capacity. Bank analysts have estimated that risk premium at $4 per barrel.

Six days ago, we had cited rising refinery runs in the U.S. as being a negative that increased supply of products and thus put pressure on the crack. If refinery runs level off, will that be a positive for the crack? Will diesel demand pick up measurably as we head to the Spring planting season by farmers?

Commentary that we cited 6 days ago spoke of a pickup in jet fuel demand heading into the busy travel season. That was borne out to some degree when looking at the very heavy amount of passengers that went thru airports over the Easter holiday weekend.? The TSA screened the largest number of flyers in 2024 so far as people traveled for Spring Break, Easter, as per a report from FoxWeather.com.

Is the strong U.S. ISM data seen Monday providing support for distillates as the data showed economic activity in the manufacturing sector expanded in March after contracting for 16 consecutive months?

Technically the crack has seen its momentum turn positive from an oversold condition. The crack fell yesterday below $26 as per data from the attached 60 minute chart, thus testing our 2nd support. But having risen more than $2 off the lows seen Monday, we see the supports and resistance that we cited 6 days ago as being operative, given the current valuation near $28.50.? Support for the crack basis the daily chart is seen at $27.42 and then at $26.10 via data from the DC chart. Initial upside resistance for the HO vs WTI lies at the $30 area.

The DC chart shows a mean reversion set up based on the settlement price for the crack of $26.62, with the DC bollinger having been above that Monday at about $26.82.

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