Heating Oil Spreads

Overview

The HO/ULSD spreads have been very strong the past few days--mirroring the NG futures strength --supported by the impending cold weather that is likely to boost demand significantly.

The spreads are also likely supported by concerns over refinery production given the weather forecasts for sub-freezing temperatures and ice storms, although the Texas Governor has said that the state is in better shape to weather the storm than was seen during the last great storm URI in 2021.

But, the uncertainty of the actual conditions that may arise and the consequences of the weather are underpinning the strength in the spreads.
We wish to add that the refinery production of distillates has fallen by 228 MBPD over the past 2 weeks, as per DOE data. This trend is likely to continue, we believe.
The reason for production to drop further -in our view-lies with the high level of gasoline inventories :  US Gasoline Inventories Rise to Highest Since 2021 --Gasoline inventories are now at the highest level since 2021 and the highest seasonal level since 2020.  (Bloomberg)

The March /April and April /May HO spreads are seeing momentum that is near overbought. Additionally cautionary for the bullish argument for the spreads in the immediate is the fact that they have tested their daily chart's upper bollinger bands this week. For the March April spread, the band intersects today at 7.0 cents and for the April May spread, it intersects at about 4.5 cents.

The March April spread has resistance at 7.00 to 7.08 cents given the past 3 sessions' highs. Above that resistance lies at the high seen in mid-November of 8.18 cents. Support comes in at 5.47-5.55 cents and then at 4.78-4.81 cents.

The April May spread has resistance at 4.92-4.95 cents and then at 6.17-6.30 cents. Support is seen at 3.58-3.61 and then at 3.14-3.16 cents. 

Overall, a return to the low values for the spreads seen at the beginning of this month seems unlikely given the fact that demand and supply will both do their part to keep distillate supplies on the lower side in the next 2 weeks or so, given the sustained cold weather expected and the possibility for distillate production from refineries to be reduced --both due to weather related impacts and the high level of gasoline inventories, that will possibly see refiners reduce runs. 

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