Profits from making diesel reached
a 14-month high as railway shipments gain and U.S. farmers plant
spring corn at the fastest pace on record, increasing demand for
the fuel.
The crack spread, the difference between the price of crude
and heating oil, rose to $12 a barrel on the New York Mercantile
Exchange, the highest level since February 2009 and up from a
2010 low of $5.58 on Feb. 25.
Freight shipments by rail, most of which are powered by
diesel, have risen 16 percent from a year ago, according to the
Association of American Railroads. About half of the corn crop
was planted as of April 25, compared with 20 percent at the same
time last year, the Department of Agriculture said yesterday.
“We’re seeing farm demand, railroad demand very strong,”
Bill Klesse, chief executive officer of Valero Energy Corp., the
largest U.S. refiner, said today during the company’s first
quarter earnings conference call. “Distillate demand in the
world is going to grow at two to three times the rate of
gasoline.”
The U.S. economy is forecast to grow 3 percent this year,
according to the median of 64 responses in a Bloomberg survey.
Total fuel demand increased 3.9 percent to 21.3 million barrels
a day in March, according to the American Petroleum Institute.
Oil Contango
Some of the strength in the heating oil margin is because
of the premium on crude oil for further-out delivery, or
contango, rather than strength in diesel, said Walter J.
Zimmerman Jr., vice president of market analysis at United-ICAP,
a broker in Jersey City, New Jersey.
Oil for June delivery was $2.56 a barrel lower than for
July today, the widest spread for the contracts nearest to
expiration since April 20, 2009. Inventories of crude at
Cushing, Oklahoma, where New York-traded West Texas Intermediate
oil is stored, surged 5.8 percent in the week ended April 16 to
34.1 million barrels, the most since Jan. 8.
The heating oil crack today topped its $2.30-to-$11.22
trading range of the past year. The spread reached an intraday
record of $36.89 a barrel on May 23, 2008, as diesel exports
soared on demand in Europe, South America and Asia.
“It’s a little early to draw analogies with 2008, but it
does appear that expectations of growing Asian demand are
driving prices again,” said Gene McGillian, an analyst and
broker at Tradition Energy in Stamford, Connecticut.
Exports Rising
Valero expects its exports of distillate fuel to jump to an
average 185,000 barrels a day during May from 80,000 barrels in
the first quarter, according to Joe Gorder, the company’s vice
president of marketing and supply.
The increase in exports stems from improved demand in South
America because of refinery shutdowns in the region, a reduction
in supplies stored offshore on tankers and higher prices in
Europe than in the U.S., said Gorder.
The heating oil margin may drop from its three-month high
as refineries return from seasonal maintenance. Supplies of
distillates have increased for three weeks as refiners boosted
rates to the highest level in almost seven months on the higher
margins and prepared for the U.S. summer, when gasoline demand
typically improves.
Supplies of distillate fuel, which includes heating oil and
diesel, rose 4.6 percent from a year ago as of April 16, the
Energy Department reported last week. Production, which on Feb.
5 was the lowest since September 2008, rose to a six-month high.
“The heat crack is vulnerable,” said Andrew Lebow, senior
vice president for energy at MF Global Inc. in New York. “As
these margins widen out, refiners are going to gear more toward
distillates and as prices rally, there will be an impact on
demand.”
Chinese Demand
China, the world’s second-biggest energy user, may increase
fuel consumption by 5 percent in the second quarter, the
government said last week. China’s industrial output expanded 18
percent in March as the economy grew in the first quarter at the
fastest pace in almost three years.
In other energy markets, the premium of gasoil over Brent
crude on the ICE Futures Europe exchange widened to $11.23 a
barrel, a one-year high.
The premium of gasoline over heating oil may not widen as
much as earlier in the decade, as economic indicators show the
U.S. economy is improving, which should boost diesel demand for
trucking. The spread narrowed to 8.87 cents a gallon from 18.37
cents March 8.
The U.S. unemployment rate was at 9.7 percent in March,
down from 10.1 percent in October.
“People are looking at diesel as a transportation fuel
that will get traction before gasoline,” said Peter Beutel,
president of trading adviser Cameron Hanover Inc. in New Canaan,
Connecticut. “As the economy improves, we’re more likely to
move goods than add jobs.”
To contact the reporter on this story:
Barbara Powell in Dallas at
bpowell4@bloomberg.net.
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