Heating oil bulls looking for some holiday cheer

While down substantially from last year, current NYMEX heating oil crack spreads still appear to be profitable; at least they are in the black. But the NYMEX cracks compare New York heating oil to Cushing, Oklahoma crude.  That comparison may work as a rough guide, but is far from perfect.

New York spot market crack spreads are much weaker. On November 16 the New York spot heating oil crack was at $1.62/b, down from $3.73/b at the beginning of the month and $17.71/b on November 17, 2008.

That spot crack spread is derived by subtracting a delivered Bonny Light crude price from the prompt New York barge heating oil price -- a still-imperfect comparison considering the prompt timing of the heating oil assessment.

It's hardly news that the US is simply glutted with distillate inventories. While the economy was already in a slump in the winter of 2008, heating oil cracks reflected tighter distillate supplies. As the economic slump continued, and refiners continued to churn out product, distillate inventories mounted.

The week ending November 6, US distillate stocks at 167.725 million barrels were 40.37 million barrels above the five-year average, according to the US Energy Information Administration.  For the same week in 2008, stocks were just 1.142 million barrels above the five-year average.

Much of that increase is in low sulfur diesel. But on the US Atlantic Coast, where the bulk of domestic heating oil is consumed, high sulfur heating oil stocks stood at 43 million barrels the week ending November 6 -- 6.89 million barrels above the five-year average, compared to a 6.4 million barrel deficit for the same week in 2008.

The bulls can take comfort in the fact that its still a bit early for peak heating demand to kick in. Sustained cold temperatures typically don't hit the New York region until December, and it may not take too long to chip away at the 6.89 million barrel surplus.

But spot gasoil crack spreads outside of the US are weak as well. The front-month Northwest European crack (Brent basis) was at $5.04/b November 16, according to Platts data, while the Singapore gasoil crack (Dubai basis) was $5.91/b and the Singapore (Tapis basis) was $3.94/b.

European traders have pointed to low demand and high inventories, some of which are still in floating storage. Heating oil sales in Germany were up 9.4% in October from September, but were down 40.1% on the year, according to a German oil industry lobby group, MWV.

Sluggish heating oil cracks have helped eat into refinery margins. For the week ending November 13, the Midwest WTI cracking margin averaged minus $1.48/b, according to Platts and Turner, Mason & Company data. That's down from an average of $5.07/b the week ending October 23.

Over the same period, the US Gulf Mars coking margin has fallen to 35 cents/b from $3.04/b, the West Coast ANS cracking margin to $3.22/b from $5.08/b, and in Asia, the Singapore Dubai margin to minus $2.65/b from minus $2.13/b.

The Northwest European Brent cracking margin has been comparatively stable, falling to $2.15/b from $2.21/b over the same period.

Of course, a rise in heating oil cracks alone isn't going to save refinery margins; cracks for all refined products are currently weak except for residual fuel, which are less negative than usual. But in the current economic environment, refiners will likely be grateful for even the most modest gains.