Some bullishness is creaping into the US heating oil market, although considering the current level of inventories -- in the US and abroad -- you have to wonder why.
The September heating oil crack spread on the NYMEX was trading around $7.35/barrel midday July 21, up from $4.31/b on July 13. The September RBOB crack has also climbed, although the spread between the two has narrowed. The September RBOB crack was trading around $9.35/b midday July 21, up from $8.09/b on July 13.
The picture is quite different out along the curve; the December heating oil crack was lingering around $7.34/b and the RBOB at $2.19/b midday July 21. This is to be expected considering that heating oil traditionally trades at a premium to RBOB during winter.
But US distillate inventories have climbed considerably since the end of November 2008. Stocks currently stand at 159.291 million barrels, according to the US Energy Information Administration, up almost 35 million barrels in 7 months.
The bulls may argue that 159 million barrels, while historically on the high side, is not unheard of as the market prepares for peak heating oil season -- stocks historically rise from April until October.
But 159 million barrels is very high for July -- the higest ever, in fact, according to EIA's data. The last time we were near these levels -- 151.466 million barrels -- was in late September 2006, at the tail end of the building period.
But heating oil (high sulfur) stocks made up a larger percentage of the total distillate pool at that time -- 62.976 million barrels in late September 2006 compared to 45.835 million barrels currently. This could be a bullish consideration -- the NYMEX contract is a heating oil contract after all.
The bulls must certainly be counting on the traditional decline in distillate stocks during the fourth quarter and subsequent first quarter. Distillate stocks rapidly fell to 117.134 million barrels by the end of April 2007 from 151.466 in September 2006, for instance.
Distillate inventories in Europe have been mounting as well -- both onshore and offshore -- although a recent narrowing in the ICE gasoil contango should slow that down, as should recent refinery run cuts.
The front/second month ICE gasoil spread settled at $7.25/mt on July 20, after lingering around $10-12/mt from the second half of May through June.
The NYMEX heating oil contango has narrowed as well, but not enough to discourage stock building, according to physical traders.
The front/second month spread narrowed to minus 3.1 cents/gal on July 20 from minus 4.8 cents/gal on July 1, while the front/third month spread has come in to minus 6.3 cents/gal from minus 9.3 cents/gal over the same period.
So, this year we will be starting with a larger base, and the big questions remain to be answered. Much will depend on winter temperatures in the Northeast, where most US heating oil is consumed, and whether the economy improves enough to put a dent in diesel inventories.
record nat gas and heating oil stocks...cracks have no biz rising. this is nuts. speculation is destroying the world economy.