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Winter Weather Arrives, Somebody Should Tell Energy Futures.

Author: Brynne Kelly 2/05/2023


Last week we were dealt a decent hand of news items that should have moved the dial higher in energy markets:

  • The coldest temperatures of Winter 2022-23 swept across the Northeastern US and parts of Canada

  • EU finally agreed to price caps on refined products, threatening supply- during the cold snap

  • A Chinese balloon with questionable intentions traveled across the entire US

The weekend cold weather was an immediate concern and would normally cause Futures to percolate and did so in spot markets. The Chinese balloon and EU price cap agreement are nuanced issues but in combination with the weather, should have given energy markets a kick. But seemingly, none of these headline items offered appreciable support to prices.

Finally Some Winter Weather

A blast of Arctic cold swept across the northeastern United States and parts of Canada over the weekend.

The National Weather Service in the US warned on Friday that the “impressive” cold front would plunge temperatures 15 to 35 degrees Fahrenheit below average across a broad swathe of the country, from the Upper Mississippi Valley to New England.

One concern for longs was, even with the extreme cold snap, was it too late in the season to make an appreciable dent in total supply used, as is sometimes the case. To this, one trader added: "Sometimes the later winter starts, the less it matters".

On that note spot prices did snap to attention (especially Nat Gas) with the cold and other news, but it did not translate to futures. The response coming out of the grid operators and utility folks was also serene, even if a little short sighted.

Power Grid Operators Remains Calm This Time

New England power grid operators expected demand for and use of electricity to hit their highest points yet this winter as bone-chilling cold took over Friday and Saturday. Yet they projected there would be more than enough power available to meet surging demand. Specifically, the independent system operator for New England (ISO-NE) made sure to let everyone know that 'fuel' wasn't going to be an issue during this cold spurt.

This would represent the highest demand so far this winter, but remain below the ISO’s seasonal forecast for peak conditions, in part because of the cold weather falling on days that typically see less consumer demand,” ISO-NE said, adding that it thinks total electricity use will peak at 379 gigawatt-hours on Friday and 371 GWh on Saturday.

While no-one expected these types to pull their hair out and admit grid failure, this was even more placid than usual coming from them-- especially when a little over a month ago they were ordering customers to cut back and implementing rolling blackouts.

According to the ISO-NE, there are other factors working in the grid’s favor this time. In their brief ahead of the cold weather they also stated that the regional supply of fuel oil is at its "highest levels of the season", and the cold snap is forecast to last only two days before temperatures start to climb back to above-average levels next week. That “limits the potential for strain on the region’s stored fuel supplies, including liquefied natural gas,” ISO-NE said.


First off, It's interesting to see how different energy providers represent their 'reliability'. Front and center ahead of cold temperatures were electricity providers. They gave an optimistic statement about fuel oil inventories. Funny, right? Because at the same time this is happening, we have news about EU refined product price caps that have the potential to dampen supply. Let's now look at that phrase "high levels of the season"

Their observation about seasonal levels is specifically tied to the ISO-NE regarding fuel oil inventories. Specifically in PADD 1, which is the US Northeast region.

US Northeast Fuel Oil Inventory - PADD 1.."High Levels of the Season"

Zooming out on PADD 1 inventory levels in the chart above, saying that fuel oil inventories are at their 'highest levels of the season', seems like 'spin' by an industry that needs to prove 'readiness'. Does anyone see a pattern here?

We're Always on the Seasonal Highs it seems...

What they also failed to mention is that spot prices for their primary fuel source in the region, natural gas, hit decade highs.


The cold snap did have an impact on spot Natural Gas prices. In fact, the result last week was the largest spike in New York natural gas prices in two decades. Bloomberg data shows next-day Natural Gas deliveries via the Iroquois Gas pipeline that transports Canadian Natural Gas into New York jumped to $164.80 per million British thermal units (MMBtu), a 14x increase from Wednesday prices. This is the highest print for Natural Gas at the New York hub dating back to 2003. Heating demand also surged in Boston. Prices at the Algonquin City Gate NatGas hub traded around $58/MMBtu, up from $12/MMBtu on the previous day.


Despite this, U.S. natural gas futures for March delivery slid about 2% to a 25-month low on Friday on forecasts for milder winter weather than expected over the next two weeks, and lower heating demand.

This hasn't bode well for ULSD (HO) futures either. If natural gas futures can't rally on legitimate demand, how can ULSD rally as a proxy?

NG Futures Collapse Despite Arctic Blast Over the Weekend


Remember last year when Russia cut off gas supplies to the EU and ULSD was purchased as a back-up fuel in case natural gas wasn't available? Time has shown that the US isn't an unlimited cheap supplier to the rest of the world because it is constrained by export capacity. This is especially true when it comes to natural gas. The US has a fixed amount of liquefaction capacity to convert natural gas in to LNG. No matter how high prices are in the rest of the world, you can't export more than your export capacity.

The entire world prepared for a winter without Russian supply. This hasn't played out exactly as expected. Meaning that local/regional market dynamics failed to fully permeate global price spreads. We may have finally have seen the impact of export capacity limits. It will be years before the next level of investment impacts import/export capacity to fall more in line with current dynamics. As a result, winter heating fuels are not living up to expectations.

US New York Harbor ULSD Futures Continue to Slide...


The price of diesel on the CME commodity exchange has come almost full circle since a settlement of $3.0865 a gallon on Jan. 3, the first trading day of the year. It dropped to $2.9719 a day later, the lowest of the month, climbed back as high as $3.5509 per gallon on Jan. 23, and has since retreated to its Friday settlement of $2.7868 a gallon.

Backwardation has diminished as 'winter' progresses without much fanfare... or perhaps good fanfare, but too late in the cycle for now.

Finally, we cannot ignore the fact that Fed monetary policy has done a number on domestic demand at the margin driving up borrowing costs for both physical and futures players in this market. More on that effect at bottom.

Turning attention to the Geopolitical risk from EU price caps next.

European Price Caps on Refined Products

Europe imposed a ban Sunday on Russian diesel fuel and other refined oil products. The ban come along with a price cap agreed by the Group of Seven allied democracies. The goal is allowing Russian diesel to keep flowing to countries like China and India and avoiding a sudden price rise that would hurt consumers worldwide.

The price cap of $100 per barrel for diesel, jet fuel and gasoline is to be enforced by barring insurance and shipping services from handling diesel priced over the limit. It follows a $60 per barrel cap on Russian crude that took effect in December and is supposed to work the same way.

The ban provides for a 55-day grace period for diesel loaded on tankers before Sunday, a step with a stated aim at avoiding ruffling markets, especially during these final cold months of winter.

“US treasury officials have two main goals: keep the market well supplied, and deprive Russia of oil revenue,” said Ben Cahill, a senior fellow with the Center for Strategic and International Studies, a Washington think tank. “They are aware that Indian and Chinese refiners can earn bigger margins by buying discounted Russian crude and exporting products at market prices. They’re fine with that.”

ULSD (HO) Futures in $/Bbl are Barely Above the $100 Cap

Given recent price history shown above, this price cap doesn't seem insurmountable. In fact the EU procrastinated until the last possible moment to make them official, conveniently when US prices had already fallen to a level that seemed almost irrelevant.

For the moment, the market is simply not digesting bullish news as it had 6 months ago. Between the weather effects and the geopolitical maneuverings, this would translate into a $3 to $5 dollar rally easily a year ago. Something has changed after the End of Year holidays.

History shows that ULSD futures prices are actually still elevated relative to past inventory levels. Thus the fear is still there, but given recent behavior, that fear factor is diminishing.

US Distillate Inventory versus US Distillate Futures...

After what we have been through this past year, it's hard to escalate new tensions or headlines into momentum. The market is fatigued and may need something new (OPEC rhetoric?) to generate fresh interest.


Normally CTAs are not a big factor in Oil. But given the lack of major speculative attention so far this year, they could add some extra short-covering jet fuel if oil were to kick higher on outside news.

CTA's are Unprofitably Short Oil...

But other than that, we don't expect them to have more 'bullets' to sell Oil unless the Fed implies even more hikes. These types will sell oil as a hedge for stocks and seasonal products frequently.

Heating Oil Cracks Fail as Winter Fails to Deliver...

However TD Bank does expect them to be sellers of ULSD length in a sideways or down market next week as they are a little over extended there historically.

Given the lack of follow through in futures markets, even with spot prices popping nicely, and the lack of OPEC pushback, US monetary policy will have a much larger impact on crude oil prices than weather and supply. The power of Powell's paper (oil) shredder has Oil trapped perhaps for now.

Crude Oil Futures Continue to be Sold...


On Friday non-farm payrolls came in much stronger than expected. Stocks, oil, and other commodities sold off on this news. The most important take-away from Friday is that short term interest rates spiked, implying that the Fed will raise again in its next two meetings whereas before Friday stocks and oil were hoping for only one more hike.

Therefore unless the current bullish factors (weather, Russian price caps) reassert themselves on futures, absent a surprise geopolitical event, Oil is being priced purely as a domestic economic product.

And absent a Biden/OPEC event, a better reaction to weather, or Fed change of heart, longs may be looking at holding, not adding. Why do we say that?


As we are writing this, Goldman Sachs head of commodities, Jeff Currie, has reiterated his concerns about oil production. However he is now talking about 2024. Further in this comment tonight, there were few allusions to current shortages as had been mentioned in the recent past. It just may be this is the equivalent of a stock analyst telling clients to Hold a stock, as opposed to suggesting Buy more of it. Goldman and JPM are not banging tables lately as they had so much only months ago. We wonder out loud if this will affect spreads at all.

Absent the fundamental drivers that carried this market higher last year, the market is dependent on the fed to back off of interest rates. Until they do, non event-driven rallies may be capped.


The recent success of the Fed and their effect on demand coupled with the (so far) effective SPR sales will only embolden them to keep treating oil like a financial asset instead of the necessary commodity that it is.

In late December the KC Fed published a powerful paper that we are sure resonates at the highest levels of US policymaking and effects oil policy. TS Lombard and Goldman note that not only has monetary policy become a more potent tool for managing demand, but it works even faster than in the past.

This will work until it doesn't. But, it may be a while before that happens. Stated another way, like everything else the government does, they will overdo this eventually....

On that note: The DOE and other government agency actions are building a deep inefficiency into an oil market that has spent decades becoming incredibly efficient. And their success may embolden them to do it again. It is almost like they do not care. Perhaps they do care, but they care about something else more.

Bottom Line:

  1. Muted Reactions to Bullish Weather: Oil has recently under-performed with some potentially serious bullish drivers out there. We are experiencing the coldest snap in years some 25 degrees below average for now

  2. High prices in other markets are not yet translating to US Futures: despite record exports last month, and current high prices for both domestic spot Nat Gas and strong overseas pricing, futures rallies are not yet sticking.

  3. Fed Demand Destruction: Until one of the above drivers is taken more seriously or a new event on the geopolitical front takes hold, this market will be unduly influenced by US fed policy and paper sellers for the next few weeks

Risks to the Upside: Other than OPEC announcements and a new cold snap not yet predicted, we want to keep an eye on China for more reopening surprises. Finally, If we get low inflationary data, that could send Oil back up along with other risk-on assets and take the Fed's foot of Oil's neck.


EIA Inventory Recap - Week Ending 1/27/2023

Weekly Changes

The EIA reported a total petroleum inventory BUILD of 9.10 for the week ending January 27, 2023. Of this, Commercial inventories posted a small weekly BUILD of 4.20 while SPR inventories were flat on the week.

YTD Changes

YTD total petroleum EIA inventory changes show a BUILD of 42.00 through the week ending January 27, 2023.

Inventory Levels

Both Distillate and Gasoline inventory levels hover at the low end of their 5-year average for this time of year while US Commercial Crude inventories slide below its 5-year average.


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