The demise of middle distillate

It has been a while since a post and the only excuse SFOT can conjur up with is that he has been bugged down by systems issues on a daily basis. The wonders of technology. Has anyone ever hoped for things to stay simple once in a while? Looking at crude prices, we really haven't done much in the past few weeks, inspite of gold and pther commodities having a great time. In truth, the physical situation in the barrel is still very much unchanged. Inventories are still high, contango widening. With rising crude prices driven by managed money, the result is lower crack spreads, i.e the profit that refiners make by breaking down crude into various fuels. This has been an industry bane all year long and the result is for refiners to idle units to lower cost, or even to shut it altogether, witness Valero last week.

As we move into winter in northern hemisphere, the industry is focused mostly on the weather. It is now well known to industry players that the winter so far has been mild and that the forecast in the next week is still appallingly warm. While this is great for us wanting a nice weekend out, it is proving costly for this industry as the supply is high and there is no demand to meet it. Spreads and cracks, in particular, has to weaken with crude prices moving up, driven by a host of new 'investment money' finding new home for their low interest earning money. Without any significant normalisation of the weather condition, we shall not see a recovery of these middle distillate which is oversupplied, and SFOT cannot see how crude prices can go much higher here. In fact, we are in a small bear move and heading lower still as i write. Is SFOT bearish? yes but not with a lot of conviction, is he tradin the range in the chart below? Yes, as most others are doing now and rightly so.



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Gasoil crack in europe