ULSD futures traded higher overnight after the API’s release of inventory estimates yesterday at 4:30 pm with prices climbing as high as $2.0844. ULSD’s rally seems overly dependent on crude oil’s price action given the API’s estimates. The American Petroleum Institute estimated crude draws for the week ending 1/5/2018 of -11.19 million while the inventory estimates for distillate fuel oil showed a build of +4.685. If the EIA confirms these estimates, it would mark the fourth consecutive weekly build in distillate with a total build over 15 million since December 15. ULSD futures have shown consistent divergence from crude oil prices in the past week, suggesting overall structural weakness. However, current ULSD prices are approaching short-term highs at $2.0906 on significant US dollar weakness. Earlier this morning, reports out of China indicated that their treasury may have recommended that the Chinese government slow or halt US treasury purchases. The event is still developing, but the US Dollar sold off heavily following the announcement.
|Crude Oil||-11.19||-6 to -8|
China has thrown a wrench into our outlook for the remainder of the week. We think the API’s estimates for crude oil inventory draws are excessive with a more appropriate draw ranging between -6 and -8 million barrels. The divergence between the API and EIA estimates could be setting us up for a ‘buy the rumor, sell the news’ event immediately following the EIA release at 10:30 am. Given the overextended nature of crude oil and the estimated build in distillate, if the EIA reports a draw closer to -6 million for crude we would expect to see ULSD prices retreat toward $2.06 and $2.05, all else equal. That being said, US Dollar performance going forward could face heavy selling pressure as a result of China’s US treasury position. Continued purchases of US treasuries by the Chinese government are still on the table, but they have left the door open to cut off treasury purchases completely. Any further losses on the US Dollar will provide support for crude oil and its products.
The spread between current ULSD prices and our intercommodity model remains narrow following China’s treasury statements. The current estimated ULSD price is $2.1223 which is $0.0386 above current prices $2.0837.