30 Dec

Why Did Crude Oil and US Diesel Futures Diverge?

WRITTEN BY Gordon Kristopher

Diesel futures  

February 2017 NY Harbor ULSD futures rose 0.6% and settled at $1.70 per gallon on December 29, 2016. It’s the highest settlement in 2016. Diesel futures rose due to the fall in distillate inventories.

Usually, diesel and crude oil (BNO) (PXI) (USO) (USL) (ERX) futures move together, but they diverged on December 29, 2016. Crude oil prices fell due to the bearish crude oil inventory report. For more on crude oil prices, read Part 1 of this series. Read Oil Market Focuses on US Crude Oil Inventories and Output Cut for more on crude oil prices.

Why Did Crude Oil and US Diesel Futures Diverge?

US on-highway diesel fuel prices  

The EIA (U.S. Energy Information Administration) reported that US on-highway diesel fuel prices rose 0.8% to $2.54 per gallon for the week ending December 26, 2016—compared to the previous week. So far, it’s the highest level in 2016. Likewise, US residential heating oil prices rose 0.4% to $2.58 per gallon for the same period.

Heating oil and diesel fuel price forecasts for 2016  

The EIA reported that heating oil prices could average $2.12 per gallon in 2016 and $2.62 per gallon in 2017. Heating oil prices averaged $2.65 per gallon in 2015. On-highway diesel fuel prices will likely average $2.31 per gallon in 2016 and $2.70 per gallon in 2017. Diesel fuel prices averaged $2.71 per gallon in 2015.

US distillate inventories drive heating oil and diesel fuel prices. Distillates consist of diesel fuel and heating oil. Please read the last part of this series to learn more about US distillate inventories.

Impact on energy stocks and ETFs  

Lower gasoline, diesel fuel, and crude oil prices could have a negative impact on US refiners and oil producers such as Valero Energy (VLO), Tesoro (TSO), Northern Tier Energy (NTI), Swift Energy (SFY), W&T Offshore (WTI), Contango Oil & Gas (MCF), and Western Refining (WNR).

The ups and downs in crude oil and gasoline prices also impact ETFs and ETNs such as the First Trust Energy AlphaDEX Fund (FXN), the PowerShares DWA Energy Momentum ETF (PXI), the Fidelity MSCI Energy (FENY), the iShares U.S. Oil Equipment & Services ETF (IEZ), and the United States Gasoline Fund (UGA).

In the next part of this series, we’ll take a look at US distillate inventories.

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