ULSD Futures: The Diesel Dividend in a Volatile Market

The energy complex is caught in a tug-of-war between geopolitical fireworks and stubbornly tight diesel supplies. While crude and gasoline markets are being rattled by Iran's recent attacks and OPEC's latest rhetoric, ultra-low sulfur diesel (ULSD) futures are quietly flashing a contrarian signal. Let's unpack the EIA data, refinery realities, and why this divergence could mean big rewards for traders willing to look past the headlines.

The Inventory Divergence: ULSD's “21% Discount”

The latest EIA report confirms what traders have been whispering: ULSD inventories remain 21% below seasonal norms, even as crude and gasoline stocks surge. While refiners are operating at a blistering 94.9% utilization rate (Figure 1), the refining process isn't keeping up with diesel demand. This mismatch is creating a structural bullish edge for ULSD futures.

The chart reveals a stark split: crude stocks are 12% above average, gasoline is 8% over, but ULSD is in a deficit. Traders who ignore this are missing the key trend.

Geopolitics: A Catalyst for Contrarian Bets

Every time Iran fires a missile or OPEC hints at cuts, traders reflexively sell crude futures—overreacting to noise. The result? WTI and Brent often get oversold, creating a buying opportunity. For example, after May's Iran port attacks, WTI dropped 7% in two days—a panic selloff that ignored strong refinery demand for crude to produce diesel.

Here's the play:
- Buy dips in WTI/Brent when geopolitical fear spikes, but pair them with long ULSD positions.
- Use options to hedge—maybe a bull call spread on ULSD futures if you're cautious.

Refinery Rates: The Real Fuel Gauge

At 94.9% utilization, refineries are running at near-maximum capacity (Figure 2), yet ULSD inventories keep shrinking. Why? Two factors:
1. Export demand: U.S. distillate exports hit a record 4.5 million barrels/day in June, siphoning off domestic supplies.
2. Summer maintenance: Gulf Coast refineries are delaying turnarounds until fall, risking winter heating shortages.

Notice how utilization stayed above 90% all summer—refiners can't slow down without risking supply gaps. This creates a price floor for ULSD.

The Gasoline Trap: Demand Is Cracking

While diesel holds up, gasoline is another story. EIA data shows distillate product supplied is flat YoY, but gasoline demand is down 4.2%—a sign of driver fatigue. Investors piling into gasoline ETNs (like UGA) are ignoring this.

Action Alert!
- Short gasoline futures against your ULSD long to hedge.
- Avoid crude-heavy ETFs like USO—they'll lag if diesel stays tight.

How to Play It

1. Go Long ULSD Futures: Target the November contract—post-harvest refining season often sees a premium.
2. Buy Refiner Stocks: Valero (VLO) and Marathon Petroleum (MPC) benefit from crack spreads widening as diesel outperforms crude.
3. Avoid Gasoline Plays: The SUN and PXE ETFs are risky with demand weakening.

The Bottom Line

This isn't a bet on rising energy prices—it's a bet on relative value. ULSD's inventory deficit and refinery strain mean it's the strongest leg in the energy stool. Ride the geopolitical noise to buy dips, but keep your eyes on the diesel data. As always, size matters: keep ULSD positions to 10-15% of your portfolio until we see sustained weakness in crude.

The market's next move? Watch the July 10 EIA report for clues on whether ULSD's deficit is worsening. If it does? Buckle up—this diesel dividend could be just getting started.

Risk Alert: Futures trading involves significant risk of loss. Always use stop-losses and consult a professional before entering leveraged positions.