London (Platts)--31Dec2010/745 am EST/1245 GMT

The contango between the first- and second-month ICE gasoil contracts has widened despite much of Northwest Europe experiencing freezing winter conditions, a situation that would traditionally have pushed up prompt demand for heating oil and led to a backwardated structure.

At 1030 GMT, the front-month January ICE gasoil contract stood at $765.75/mt, with February at $771.75/mt -- a contango of $6/mt, the widest since December 9.

The second-month contract was $4.50/mt higher than its front-month counterpart on December 23.

Traders pointed to Germany's move to lower sulfur 50 ppm heating oil, which has been gathering momentum through much of 2010, as effectively pulling the rug from beneath the staple 0.1% sulfur gasoil market's activity.

"People don't want to accept that the demand is not for 0.1% any more, even in a cold winter," one trader said.

"Germany is the big market for gasoil," the trader continued, accounting for something in the region on 80% of Northwest Europe's gasoil demand.

However, Germany has pioneered a program wherein consumption of lower sulfur 50 ppm heating oil is incentivized by a preferential tax structure.

That has seen the country moving progressively towards 50 ppm, undermining the conventional demand for 0.1% in the region.

ICE gasoil contracts have traditionally reflected that German demand for 0.1% heating oil, with the contract centered largely on the Amsterdam-Rotterdam-Antwerp trading region.

With the change in demand patterns, market participants with 0.1% to sell are increasingly looking towards the export market as an outlet for the unwanted product.

"It goes to the US, it can go to West Africa or South America or to the Mediterranean, but you need a wide arbitrage [to make it work]... it's a big investment to export," the trader continued.

"So, most of it has to go into ARA," he said, with the excess volumes keeping the ICE gasoil structure in contango, despite Europe entering the peak demand period of winter.

Equally, with the contango a dominant factor in middle distillates for a prolonged period, tanks remain well stocked with the redundant heating oil, with traders looking to make physical deliveries of the product into the ICE gasoil contract at expiry.

"Everyone is still full with 0.1%. People try to make delivery into the screen [against the expired ICE gasoil contract]," the trader said.

"It's the same for everyone. If the price collapses, you keep it in tank and roll it over and wait for the next expiry."

--Tim Worledge, tim_worledge@platts.com

Similar stories appear in European Marketscan See more information at http://www.platts.com/Products/europeanmarketscan