Three factors to consider when trading diesel futures

The price of both oil and refined products responds to changing expectations for economic growth. When the economy is strong, oil demand will be higher; If the economy slows, oil demand will also decline. However, it’s not really oil that changes with economic growth, but rather diesel demand. Diesel drives global economic activity, with diesel engines powering trucking, trains, agriculture and mining. All else being equal, positive economic news is positive for diesel demand.

Example: A trader notices that the oil and stock markets are trending upward due to strong economic growth data. The trader continues to monitor the economic data and sees signs of weakness in production reports as well as a slowdown in diesel demand in the EIA’s Weekly Petroleum Status Report and is confident there will be a global slowdown. He sells an MHO futures contract and holds his position until the jobs report the following Friday, where he finds his thesis confirmed by another round of weak data and ULSD futures see a significant decline.