The profit from turning crude into heating oil and diesel fuel has jumped to almost double that for gasoline as U.S. exports to Europe and South America climb.
Heating oil futures on the New York Mercantile Exchange, which trade as a surrogate for diesel, increased 13 percent in the third quarter, helping to drive the profit from producing heating, industrial and trucking fuel to almost three times what it was a year ago. A port workers strike in Marseille, France, also led to a shortage of fuel supplies in southern Europe.
“It’s reflecting something of real value,” said Ed Morse, head of commodities research at Credit Suisse Group AG in New York. “Diesel demand is strong, heating oil as well. Europe is structurally short of distillate for the winter.”
Exports to Europe and South America are being bolstered by evidence that growth in some of the continents’ biggest economies is accelerating. Gross domestic product in Germany, Europe’s biggest consumer of heating oil, will expand 3.4 percent this year, according to the European Commission. Argentina’s will increase 8.3 percent, the median of eight analysts’ estimates compiled by Bloomberg show.
The profit from refining crude into heating oil, the so- called crack spread, was $13.06 a barrel at 12:26 p.m. today, based on Nymex futures, compared with $7.36 for gasoline. The corresponding spreads were $5.24 and $2.68 a year ago. On ICE Futures Europe, the margin for gasoil, the equivalent of heating oil, was $12.26 a barrel, compared with $9.21 a year earlier.
The supply of gasoil, a category of fuel that includes heating oil and diesel, in independent storage in Europe’s Amsterdam-Rotterdam-Antwerp oil-trading hub is 17 percent below a year earlier, according PJK International BV data, reflecting the region’s growing use of the fuel.
Supplies may fall because of a strike began Sept. 27 at the Fos and Lavera terminals, stranding 51 vessels and forcing refiners to cut production. Six refinery crude-units in France and one in Switzerland are running at minimum rates in an effort to avoid halting operations entirely, according to Union Francaise des Industries Petrolieres, a refiners’ organization.
The disruption could mean a loss of about 90,000 barrels a day of gasoil production, according Christophe Barret, a London- based analyst at Credit Agricole.
Diesel demand in 16 European Union countries this year will be about 3.68 million barrels a day, up from 3.6 million in 2009, according to Andrew Reed, an analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. In June, July and August, demand for heating oil in Germany was 387,000 barrels a day, up from 255,000 a year earlier, Reed said.
“Demand for diesel and heating oil in northwestern Europe came roaring back this year,” Reed said. “The U.S. has a lot of low-sulfur diesel.”
Shipments to Europe are also growing as traders seek to profit from price differences between the two regions through a so-called open arbitrage. Ultra-low sulfur diesel in the Gulf Coast spot market averaged over September was $2.1489 a gallon, or about $676.81 per metric ton, compared with $693.48 for cargoes delivered into Northwest Europe, according to data compiled by Bloomberg, while freight costs were about $11.75 per ton.
“There are a number of cargoes going to Europe from the Gulf Coast,” said Andrew Lebow, senior vice president for energy at MF Global Inc. in New York. The arbitrage to Europe “is open and when you get a window, you take advantage of it,” he said.
Crack May Narrow
The heating oil crack spread may narrow once European and U.S. refineries increase rates by the end of this month and focus on producing diesel, according to James Cordier, portfolio manager at OptionSellers.com. The difference between November heating oil and gasoline was 13.86 cents a gallon as of 12:27 p.m. in New York, after reaching a 13-month high of 20.73 cents on Oct. 1.
“The 20-cent difference is probably about as wide as it can get,” said Tampa, Florida-based Cordier, who manages more than $100 million. “The harvest season and maintenance season will be over. But this rally has a little bit of legs yet.”
Between 45 percent and 47 percent of U.S. oil is refined into gasoline, said Andy Lipow, president of Lipow Oil Associates LLC, a Houston-based energy consultant. Between 25 percent and 29 percent is turned into distillate.
“You can adjust one at the expense of the other while staying within those ranges,” Lipow said. “In 2008, they went to 29 percent distillates in some of the months” when the heating oil crack spread was more than $36 a barrel.
About 328,000 barrels a day of refining capacity has been offline in Europe this quarter, compared with 206,000 last year, according to Bank of America Merrill Lynch data. In the U.S., about 465,000 barrels a day of capacity was out of action, versus about 304,000 a year earlier.
“We’ll have a couple more weeks of good times,” said Francisco Blanch, head of commodity research at Bank of America Merrill. “Within three weeks, the trade to think about is long gasoline and short heating oil.”
U.S. exports have trimmed inventories in states along the Gulf of Mexico by 7.3 percent in four weeks, eating into a surplus, according to Energy Department data released yesterday.
U.S. supplies of distillates as of Oct. 1 were 22 percent above the five-year average for the period amid forecasts for higher-than-average temperatures. The Weather Channel’s WSI Corp. forecast northeast and central U.S. states will record warmer-than-normal temperatures from October to December.
Valero Energy Corp., the second-largest U.S. refiner, exported one-fourth of its Gulf Coast production this year, the company said in a Sept. 29 presentation to analysts. Most of those shipments were distillate bound for Latin America, said Bill Day, a spokesman for San Antonio-based Valero.
“Demand for diesel will rebound faster than the demand for gasoline,” Day said in an interview.
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