Distillates have been holding up the petroleum complex, with the NYMEX December heating oil crack spread sitting above $20/b this week.
But with global markets entering a recession, and natural gas significantly cheaper than distillate fuel, how long until distillate spreads tumble and leave refiners with no choice but to cut runs?
US distillate exports in August hit a fresh record high of 849,000 b/d, with a good chunk of that heading to South America for heating and power generation. Europe also gobbled up its fair share, primarily for transportation use.
But with economies slowing and belts tightening, European driving demand should slow, as should industrial demand in South America. As for US demand, this winter could be a dud for heating oil, with natural gas far cheaper.
Spot natural gas at the New York citygate was worth $7.43/MMBtu Thursday, according to Platts data, compared with $13.87/MMBtu for heating oil. Diesel is even more expensive than that. There is anecdotal evidence of residential and commercial fuel-switching from distillate to natural gas, and it's not hard to see why, looking at the relative price.
So is a heating oil crack at $20/b justified? Seems like buyers would be betting on a harsh winter in the northeast US and in northwest Europe. If temperatures remain moderate, that spread could come in fast, which would likely mean widespread run cuts.
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