ULSD August September Spread--7/3/25

Overview

The August September ULSD spread rallied yesterday to a fresh contract high on the back of strong DOE data and the carryover of the strong expiration for the July ULSD contract and its front month spread seen 2 days prior.

But we see a few things that suggest that the spread has topped out. Technically, the spread has a mean reversion set up from yesterday's close over the top bollinger band on the daily chart. That upper chart bollinger band today intersects at 5.23 cents. A further negative for the spread is the fact that momentum is turning downward from a nearly overbought condition. Resistance to the upside is seen at the high from yesterday at 5.59 cents. Support comes in at 3.45 and then 2.35 cents via the 60 minute chart for the spread.

Fundamentally as much as yesterday's distillate demand was strong and the DOE data showed a large draw, we see some elements to the report that going forward are cause for some possible concern over supply in the coming weeks.
Distillate demand rose by 249 MBPD to a strong figure of 4.043 MMBPD. This beats the prior 2 years demand by 230 to 330 MBPD. But, some of the euphoria of that demand figure may be dialed back by the very strong distillate output figure seen in this week's DOE data. Distillate output rose on the week by 245 MBPD to a total 5.034 MMBPD. It seems refiners have changed their production mix to favor more distillate production as the gasoline production in this week's stats shows a drop of 491 MBPD to a total of 9.621 MMBPD. The strength in the distillate margins coupled with some weakness in gasoline margins seen over the past 4-6 weeks looks to have given incentive to refiners to change their refined  product output mix. The 245 MBPD rise in distillate production and a 341 MBPD fall in net exports of distillate helped counter stronger demand and thus limited the size of the overall draw in distillate supplies.

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