Over The Barrel: Focus on Heating Oil
Heating oil values have attained record high levels in sympathy with the strength to crude values and also on growing concerns over the adequacy of distillate stocks for transportation and heating in major OECD areas. Prices have risen from a low of 1.70 in January 2007 to a high of 2.65 reached on November 8th. Retail prices for heating oil also reached record highs of 3.11 in the week of November 5th, while Retail Diesel prices reached a high of 3.30 per gallon nationally.
Although crude oil prices will have a major impact on heating oil values, the winter heating season and stock levels will also be key contributors to the outright as well as the spread relationship to crude oil or 2 oil crack. Currently the crack spread is relatively firm and appears to be attempting to stabilize following weakness over the past month that reflected the developing tightness in crude stocks and the lack of U.S. demand due to moderate temperatures. Maintaining this recent strength will be contingent on declining stock levels of distillate along with stabilization to the crude stock situation. This does not appear likely at this juncture without winter temperatures moving to below normal levels and raising utilization rates. Currently, the national weather forecast puts population weighted degree days at levels above a year ago but below normal levels.
Stocks levels are not at critical levels either. Total distillate stocks at 135.4 mb is well above the 4 year average of 126.6 mb and totals 30.6 days supply compared to 29.4 days for the four year average. To a large extent stocks appear excessive, which in the absence of weather and further tightness in crude could derail the heating oil market both on a flat basis and on spread basis relative to crude and gasoline. Although prospective supply tightness in crude oil and a firm arbitrage in Europe could attract cargoes from the U.S. and help underpin values, a lack of significant weather in the U.S. might allow for a decline in values toward the 2.38 area basis February and an erosion in the Feb 2 oil crack from current levels around 18.00 down toward the 12.00 area.
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If you have questions about Over The Barrel, please contact Steve Platt at 1.877.977.7931 or stephen.platt@archerfinancials.com.
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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.
