DTN Oil

WASHINGTON (DTN) -- While advancing on the week, New York Mercantile Exchange oil futures and the Intercontinental Exchange Brent contract settled Friday's session mixed with ULSD futures the outlier, rallying for a sixth consecutive session, and spiking to a six-month high. The moves came amid critically low inventory of middle distillates in the United States and globally just days ahead of the start of the heating season.

The November ULSD contract, which expires Monday, Oct. 31, surged $0.2159 Friday and $0.7175 since the prior Friday to a $4.5498-per-gallon settlement after trading at a $4.6841 six-month intraday high on the spot continuous chart. Low stock levels and strong demand pull as buyers look to secure product on worry over supply availability blew out the prompt spread, with the backwardation widening to $0.8043 per gallon. The previous high, a record, was reached in late April at $1.127 per gallon amid a short squeeze ahead of the May contract's expiration as the market worried over product availability in the weeks following supply disruptions caused by Russia's invasion of Ukraine.

This week's rally in ULSD futures was realized amid widening diesel shortages, which are spreading from New England and broader New York area to the Southeast and westward to Tennessee. Reported outages and allocations at distribution terminals all along the East Coast were exacerbated by low levels on the Mississippi River that is constraining barge movement. Valero Energy reportedly cut runs at Memphis refinery by about 20% due to shipping issues on the Mississippi River.

Nationwide distillate inventories have been running consistently below the five-year average for much of the year, with strong exports and domestic demand drawing down stockpiles. Now, with the heating season beginning in less than a week, low supply is amplifying fears over fuel rationing this winter. Particularly sensitive are New England states, which account for the largest concentration of households and businesses that use heating oil for space heating.

Diesel shortages are not just an issue for the U.S. energy market. In Europe, expected loss of Russian diesel exports combined with production outages in France have left parts of the continent short supply, according to the head of Spanish oil refiner Repsol SA.

"We are running out of middle distillates in some European countries," Chief Executive Officer Josu Jon Imaz said on an earnings call, adding that "there is room to see high diesel prices in the coming months."

Recent strikes in France, which knocked refineries offline, have also squeezed the market, triggering a surge in imports. Last week, U.S. exports of crude and petroleum products surged to a record-high 11.4 million barrels per day (bpd) amid the tight global market disposition.

The resulting high prices for distillates amid the low supply will further contribute to rising inflation. In Germany, the European Union's largest economy, inflation unexpectedly accelerated this month to 11.6% from a year earlier, following a trend already seen in France and Italy.

Italy, the EU's third-largest economy, Friday morning reported consumer prices grew to 11.9% in October -- the fastest since 1984 -- with energy prices surging a mind-blowing 73.2% year on year, up from 44.5% in September. For the Eurozone, inflation quickened to 10.7% in October from 9.8% in the previous month.

Against this backdrop, European Central Bank approved a second consecutive 75-point rate hike on Thursday, matching expectations by economists, but the softened language around their commitment to raise rates further for "several meetings" to simply saying they expect borrowing costs to be raised "further." Markets interpreted ECB messaging around future rate hikes as dovish, suggesting a possible pivot on rates by the central bank early next year. Traders reversed some of those trades on Friday following the inflation data and comments from ECB officials, betting the central bank's key rate will peak at around 2.85% in 2023, up from about 2.65% at Thursday's close.

On the session, December West Texas Intermediate futures fell $1.18 to $87.90 per barrel (bbl), and ICE December Brent dropped to $95.77 per bbl, down $1.19. November RBOB futures fell 10.50 cents to $2.9066 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges can be reached at liubov.georges@dtn.com