Focus: Heating Oil   

Introduction

The passage of Labor Day will mark the shifting of focus from RBOB gasoline to heating oil as the North American winter approaches. The spread relationships between crude and gasoline relative to heating oil will likely see greater volatility. In addition, jet kero and diesel, whose pricing is related to that of heating oil, should also be affected, particularly with new requirements taking effect to reduce the level of sulphur in distillate fuels used in transportation.  

Overview

Heating oil values have traded in a rather wide range of 1.60-2.15 basis spot over the past year. Spreads have generally strengthened with the Dec-Jan spread trading at a premium of 4.50 to Jan compared to as high as 8.40 premium Jan evident in May. The narrowing of the spread reflects the tightening stock situation, which appears to be related to low refinery utilization, along with the buoyant demand for diesel from the transportation sector. 

Distillate stocks as of August 17, which include heating oil and low sulphur diesel, stand  at 129 mb compared to 135.5 mb last year and a four year average of 128.7 mb.  Product supplied, or apparent demand, totaled 4.4 mb compared to 4.2 mb a year ago and a four year average of 4.1 mb. Availability should tighten as usage in transportation, particularly during the large corn harvest, generates additional demand for diesel.  The strong demand for diesel should compete aggressively for supplies of distillate and limit availability of higher sulphur supplies as heating oil.  Padd 1 (East Coast) stocks in particular appear particularly tight at 51.7 mb, which is over 8.6 mb below year ago levels and close to 5 mb below the 4 year average.

Price Outlook

The tight stock situation should help maintain underlying support not only on an outright basis but also on the spread to gasoline and crude. The 2 Oil crack, which shows the relationship of heating oil to crude on a per barrel basis, has begun to find support basis January. Pullbacks to the 15.00 area in the Jan 2 Oil crack should be viewed as a buying opportunity provided 13.50 holds on the downside. The potential exists, if stocks grow tighter and imports from Europe continue to decline, for the crack to move out to the 21-22 area. The higher usage in Europe is absorbing a greater proportion of distillate leaving less for export to the states

On an outright basis, the market will be subject to the movement in crude oil as we advance toward the OPEC meeting in September. However, we still maintain a friendly bias longer term in crude and suspect the heating oil will be able to rally as we move into the fall. For Jan heating oil, we favor bullish strategies and would look at a long position in January heating oil near at 1.97-1.98 risking 1.9370 with an objective of retesting the 2.18-2.20 level.

For more information on Over The Barrel, please contact Steve Platt at 1.877.377.7931 or stephen.platt@archerfinancials.com.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation.  The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition.  The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company.  Copyright © ADM Investor Services, Inc.  

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