December 7, 2010 / 7:17 PM / 7 years ago

U.S. heating oil season kicks off well stocked

* Northeast stocks 7 pct higher than 5-year average

* Strong refining margins will keep heating oil in stock

* First cold snap to boost heat oil demand 16 pct this wk

* 2010/11 heating season not expected to deviate from norm

By Jeffrey Kerr and Selam Gebrekidan

NEW YORK, Dec 7 (Reuters) - The U.S. Northeast is well supplied with heating oil as the first cold snap grips the world’s largest heating oil market, analysts and traders said on Tuesday.

Crack spreads, or the difference between the cost of heating oil and crude oil, look favorable for the production of more of the fuel even as forecasts point to a more-or-less normal winter heating season, they said.

The U.S. Northeast, which is mainly supplied with fuel through the New York Harbor market, has experienced its first bout of winter weather in the 2010-2011 heating season, with snow just north and west of New York City reported.

The U.S. National Weather Service said last week’s U.S. heating oil demand was 5 percent below normal, but is expected to increase to 16.1 percent above normal this week on the back of the first major cold snap of the season. [ID:nN07DD]

The region also has more than ample heating oil inventories for the beginning of the season.

In terms of U.S. weekly ending stocks of heating oil, as reported by the U.S. Energy Information Administration, stocks in PADD 1, or the Northeast, in the last week of November were at 41.7 million barrels, 7 percent above their five-year average of 38.988 million barrels, but below the same week last year by 3.3 million barrels.

(Graphic on PADD 1 stocks and harbor differentials: link.reuters.com/xuw88q )

Northeast heating oil stocks were 41.7 million barrels at the end of November and were only about 200,000 barrels lower than the beginning of the month, according to the data.

“It has only been cold for a little while here in the Northeast. I would think it would take a prolonged spell of decent cold to lift cash market levels,” said a New York Harbor trader.

In the physical or cash market, prompt price differentials to the futures screen are weak at 3.50 cents per gallon under the January heating oil futures contract on the New York Mercantile Exchange, compared with a slight discount to the screen in mid-November. This weakness is reflective of ample stocks in the region.

Still, heating oil futures prices have soared on the back of cold weather in the U.S. and Europe, with the January NYMEX heating oil contract currently trading at its highest level since Oct. 16, 2008. Heating oil futures prices have risen 10 percent from the beginning of November on the back of weather and the health of the global economy.

“The NYMEX heating oil contract is more a proxy for global demand growth, not necessarily just heating oil demand in New York. The weaker dollar is pushing commodities higher,” said a U.S. Gulf Coast trader.

The January distillate crack spread on NYMEX CL-HO1=R has consistently traded around $15.00 per barrel throughout the last month, giving refineries a hedging incentive to produce as much heating oil as they can.

Looking forward, heating oil cracks only drop from these unusual levels to the low $14.00-14.50 range in April, so any potential increase in demand should be able to be met throughout the winter.

“The Gulf Coast heating oil market is very weak and there’s lots of product around. Harbor differentials are going to get weaker, especially with Gulf Coast product 8.50 cents per gallon under, there will be plenty coming up here,” said a another New York Harbor trader.

Meanwhile, weather forecaster Accuweather said the longer-term winter heating season prediction was not nearly as bullish for heating oil.

“It is not really that cold for December in the Northeast and we’re expecting some warm days soon,” said Accuweather chief long-range meteorologist Joe Bastardi.

In mid- to late January, and later on in February, temperatures will be near normal in the northern parts of the Northeast and the Southern parts will be a degree (Fahrenheit) (0.6 Celsius) or a half above normal, he said. (Editing by Marguerita Choy)

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