Midwest ULSD Basis Soft as Winter Demand Risks Build

DAVENPORT, FL (DTN) — Midwest ULSD differentials are leaning soft as winter sets in, with colder-than-normal forecasts boosting seasonal demand risks even as basis values remain anchored in deeper discounts.

On December 15, Group 3 ULSD was assessed at 30cts discount to front-month NYMEX ULSD, while Chicago Western Badger traded at a 33.5cts discount, leaving Group 3 with a 3.50cts premium to Chicago. The spread is also slightly higher in the southern Midwest with its heavier supply deficit compared with the supply-comfortable upper Midwest hub.

Weather remains the immediate driver for the variance. The region is heading into a colder stretch, with below-normal temperatures expected across the Plains and Great Lakes, according to NOAA’s Climate Prediction Center. This pattern often lifts heating and trucking demand and increases terminal activity around Chicago when cold snaps develop.

Group 3 also benefits from a denser refinery network than the Chicago rack area, giving the hub more consistent access to barrels. PADD 2 refinery utilization has been elevated this season, with EIA weekly data showing rates in the 90–95 percent range in early November, reinforcing steady production flows into the southern Midwest. With more supply feeding that corridor, Group 3 must discount further to clear barrels, aligning with the deeper basis now seen against front-month ULSD futures.

Lower stocks leave the Midwest with less breathing room if demand strengthens. PADD 2 distillate inventories were 25 million bbl in the latest EIA report, down from 26.4 million bbl at the same time last year. This represents a decline of 1.4 million bbl compared to the same period last year. ULSD-grade stocks show the same pattern: 24.4 million bbl versus 25.8 million bbl last year. Entering winter with a slimmer cushion raises the stakes if heating and transport demand accelerate.

Retail fuel trends remain steady but firmer. PADD 2 on-highway diesel averaged $3.635 per gallon, or 23cts higher than the same week last year, according to DTN Energy data. Pump levels sitting above marks from a year earlier while spot basis trades deeply discounted suggest a market with orderly logistics but softer near-term spot appetite.

Group 3 premium to Chicago reflects relatively firmer demand and tighter balances in the southern Midwest, where steady rack movement and logistics support basis levels. Chicago, facing more comfortable supply conditions in the Upper Midwest, remains softer by comparison and must discount further to keep barrels moving.

Looking ahead, traders are watching how quickly winter demand materializes across the region. A sustained cold pattern could narrow the gap by lifting Chicago ULSD basis, especially with inventories already below year-ago levels.

But if demand builds gradually and logistics remain stable, Group 3 and Chicago are likely to hold near current discounts, with Group 3 maintaining a modest premium as long as southern Midwest pull remains stronger.