As the Yuletide season approaches, it appears that Frosty the Snowman might be opting for remote work engagements, given the latest weather runs in Europe to be at or just above seasonal normal temperatures until early January. Notably, temperatures across Berlin, Hamburg and Munich were forecast to be 6-8 degrees above the five-year average by Dec 18 according to Platts Gas and Power alert which follows last week’s trend of Germany and other nations trying to sell their cargos until the end of the year.
Further adding to the weakness, we have seen the weaker Brent futures market leading the gasoil market lower with gasoil selling off in line with crude into the beginning of the week. The selling saw levels falling sharply into oversold territory at the beginning of the month. The Jan crack, with the exception of 2022, is still looking historically high and we have been seeing heightened volatility in recent days.
With the current mild weather conditions, inventory levels are becoming a key focus in the gasoil market discussion. Europe is on track to receive a significant increase in diesel imports from the US this December, reaching levels over 290kbbls/d, according to KPLR and Bloomberg. These import volumes are the largest seen since July 2018. Additionally, transportation issues, particularly high water levels in the Rhine, are causing difficulties in moving barrels beyond Germany and we are seeing stocks in the ARA rising w-o-w. In a related development, the latest data from the EIA showed that distillate and heating oil inventories in the US increased by 1.5 million barrels in the week leading up to December 8th.
Weekly US Distillate Stocks
The current market trends are leaning towards a bearish outlook, but considering the present levels, we see a potential for short-term gains.
When we examine the positioning of speculators throughout the year in relation to the Month 1 IPE Gasoil crack, there’s a clear trend between the front-month prices in the crack and changes in these speculative positions. Our Onyx CFTC Brent predictor indicates that we can expect an increase in speculative length for another week, suggesting continued interest and potential movement in the market.
Onyx Weekly Gasoil CFTC Predictor
This more bullish position would be best expressed by adding length in spreads given the volatility in the cracks where we believe the trade may be less protected should refiners come in to hedge. Given the sharp sell-off in spreads on the 12th of Dec, we believe going long the Jan/Feb IPE spread offers good risk-reward in the short term.
