3:2:1 Crack Spread:
The 3:2:1 Crack Spread was up 0.37 cpg this week, closing at 14.14 cpg. We rallied up to 17.13 cpg this week before we setback by weeks end. I am negative on this spread, especially after the rally we have seen over the past few weeks. The back months well above 20+ cpg and this is too high considering the supplies and demand. The premium in the back months gives us room for a sharp break if demand does not improve. Distillate inventory and demand should prove too much to overcome. This should limit the upside, until we see a change in the facts. The impetus for the change is usually price going down and going down sharply. Gas inventory is high, compared to a year ago and demand is running below a year ago. If inventory builds, we should expect downward price pressure to begin to be the rule. The question is what will make this spread improve from here. I still can see nothing that should be a driving force to cause this spread to move up, until inventory decreases or demand improves. We will have rallies, but they will not last long and they will not carry us up much. A drop to the record low at 1.51 cpg can happen if demand drops this winter. If something does not change in the supply and demand structure price problems should come back. If the Gas Crack weakens, it is almost impossible to think the Heating Oil Crack can move this spread to higher levels. The fundamental facts caused the collapse, and they will take time to reverse and correct the imbalances. Expect more weakness and lower prices. This may end up being especially true in the back months. They are trading at a sharp premium to the front months and this may attract continued selling. Unless we see a change in the demand levels, I doubt we can hold the premiums in the far out months. Either demand for products must improve, or production must fall sharply. If this does not happen, inventory will be building, and there will little chance for a sustained rally. We will then more than likely see another price collapse. The spread traders are going to continue to sell this spread every time it rallies, especially with the premium in the back months. The lack of demand in the distillate market, with a huge inventory, and if Gas demand drops, as it normally does at this time of year, is a major problem. If that is the case, expect downside price action in the spread. If we see Distillate demand increase, we can stabilize and/or go a little higher. If there is no demand increase, we probably have to go sharply lower. We cannot recover to higher prices until the refiners slow down the production. If demand runs the market, and there is no demand, price must generate the demand and that means lower prices. The Vol Price Indicator is at the bottom of its range for the 9th week in a row, and this is bearish. The % Total Count Indicator is 27%, rising and this is bullish. The other two Indicators are at 33% and 42%, both falling and this too is bearish. The Indicators and the facts remain very negative as of now.
Dennis Mangan, logi Energy, More on Last Week’s Crack Spread
3:2:1 Crack Spread: