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Diesel Rally, Not Gasoline, Could Be Taunting Fed Next

Published 08/04/2023, 03:54 PM
  • Diesel could emerge as a new inflation worry for Fed
  • Heating oil, a proxy for diesel, is up 28% over 6 weeks vs an 11% gain for gasoline
  • Tight diesel stocks to blame, say bulls; some claim there’s more hype than fact
  • The Federal Reserve’s worry about rising oil prices has almost always been at what Americans would pay for gasoline. In a rare shift, the greater concern in coming months might be over what a gallon of diesel costs at the pump.

    New York-traded futures of heating oil, a proxy for diesel, have rallied 28% over the past six weeks, outpacing the 18% rally in crude oil over the same period. The price of gasoline, in contrast, has gained  just about 11%, heading for a loss this week after a run-up in five weeks prior.Heating Oil Weekly ChartCharts by SKCharting.com, with data powered by Investing.com

    Analysts say lower-than-usual stockpiles of heating oil, derived from a category within the crude oil barrel called distillates, is to blame.

    Distillate fuel inventories decreased by 0.8M barrels last week and are about 15% below the five-year average for this time of year. In Thursday’s trade, a gallon of heating oil for September, the front-month contract on the New York Mercantile Exchange, rose above $3 the first time since January.

    Phil Flynn, an analyst at Chicago’s Price Futures Group, who for years has been advocating higher energy prices on grounds that global hydrocarbon supply is severely mismatched to demand, said:

    “That is not good because even as we have seen a slowdown in US manufacturing, the diesel supplies are way too tight,” 

    But, even so, demand for fuels has been underwhelming to a degree this summer.

    Stockpiles of gasoline have fallen by a net 2.322M barrels over the past six weeks while Inventories of distillates have actually gained by 2.867M in the same period.

    The American Automobile Association, or AAA, says gasoline price increases might actually be benign this summer despite initial worries they could reach toward the June 2022 record high of $5 a gallon.

    The national average for a gallon of gas has continued its summer U-turn, the AAA said in a blog post Monday, while noting that price increases have slowed and more relief could be on the way.

    “Last month’s extreme heat played a role in the recent spike in gas prices due to some refineries pulling back, but now operations are getting back to normal,” Andrew Gross, an AAA spokesperson, said in the blog. “Coupled with tepid demand and declining oil prices, this may help take the steam out of the tight supply price jolts we’ve seen lately.”

    The national average increased by 11 cents since last week to $3.82. Pump prices have primarily risen due to the price of oil, which was near $80 per barrel last week, but has since softened recently.

    According to EIA data, gasoline demand, as measured by the total gasoline product supplied to the marketplace, decreased slightly from 8.94M per day to 8.84M daily last week. But total domestic gasoline stocks increased by 1.5M barrels daily to reach 219.1 M bbl.

    “Lower gas demand amid increasing supply will likely help to slow price increases in the days ahead,” the AAA surmised.

    The same might not be true for distillates and diesel.

    A slew of refinery outages across key regions, partly due to the excessive heat that’s blanketed much of the Northern Hemisphere, could cause undue tightness in diesel stockpiles in the remaining weeks of summer, Bloomberg noted in a report Thursday.

    And the supply tightness could last beyond the summer as supply cuts by Saudi Arabia and Russia force fuel makers to swap diesel-rich heavy oils for lighter American crudes, further curbing production. Already more than 1 million barrels a day of refined fuels have been removed from the market, according to a JPMorgan Chase & Co estimate published by Bloomberg.

    “The unseasonal summer strength has outpaced the resurgence in crude prices, offering another inflationary headache for central banks just as some are expected to pause rate hikes,” the report concluded. “And it’s a stark reminder that the crisis threatening to burden farmers, put truckers out of business and leave homeowners in the cold is far from over.”

    As aforementioned, gasoline has been at the front and center of the Fed’s fight against energy-driven inflation.

    Diesel is a different animal, affecting businesses more than American workers outright, and its input into the economy is more nuanced. Yet, with the Fed being razor-focused in the last leg of its inflation battle — i.e. bringing price growth to 2% per annum from the current 3% and versus last year’s 9% — any undue pressure from the energy complex won’t be welcome.

    “We haven’t reached the point where diesel supply is so short that businesses can’t get enough of it,” said John Kilduff, partner at New York energy hedge fund Again Capital. “There is a shortage,  yes, but not the kind you read of in the media. We’ll have to see how much further the diesel rally can go to perpetuate that myth.”

    Heating Oil Daily ChartDiesel could get beyond $3.50 a gallon, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

    “The current bullish rebound is likely to face a challenging resistance at the monthly Middle Bollinger Band of $3.17,” said Dixit.

    The daily Relative Strength Index, or RSI, at 82 and Daily Stochastics at 96/90 indicate strength in current bullish momentum which may start showing initial signs of exhaustion if $3.17 is not breached with conviction, Dixit said.Heating Oil 4-Hour Chart On the flip side, the 100-week Simple Moving Average, or SMA, of $3.01 serves as immediate support, below which $2.96 and $2.82 would be a horizontal support base, Dixit added.

    “Any further advances will require a strong breakout above $3.17, at which the next major upside resistance zone may come at $3.40, followed by $3.50 and $3.58 over an extended period of time.”


    Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

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