Heating Oil Gains on Speculation Japan’s Diesel Demand May Rise

Heating oil rose on speculation that factories and utilities in Japan will buy diesel and fuel oil to replace the power output lost from nuclear plants after the country’s strongest earthquake on record.

Futures advanced as the 8.9-magnitude earthquake and subsequent tsunami that struck on March 11, killing thousands, damaged three nuclear reactors, according government reports. Japan relies on 54 nuclear reactors to supply 30 percent of its power, according to the International Atomic Energy Agency.

“Japan is desperately in need of diesel and fuel oil for power generation,” said Ray Carbone, president of Paramount Options Inc. in New York.

Heating oil for April delivery rose 3.48 cents, or 1.2 percent, to settle at $3.0638 a gallon on the New York Mercantile Exchange. Heating oil is traded as a substitute for diesel.

The spread between heating oil and gasoline front-month contracts widened to 10.35 cents, the widest since Feb. 28.

Heating oil volume in electronic trading on the Nymex was 135,324 contracts as of 3:32 p.m. in New York, 13 percent above the average during the past three months. Gasoline volume was 76,837 contracts, 29 percent below the three-month average.

Japan Plants

In Japan, workers battled to prevent a nuclear meltdown after a second blast rocked an atomic plant north of Tokyo. Some of the nation’s largest manufacturers, including Sony Corp., Honda Motor Co., Nissan Motor Co. and beermaker Sapporo Holdings Ltd., shut down facilities in northern Japan.

“The likelihood is they will need some diesel for generators,” said Andrew Reed, a diesel analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

The earthquake has shut or disrupted supplies from refineries accounting for about 29 percent of the nation’s processing capacity, or 1.3 million barrels a day, Edinburgh-based Wood Mackenzie Consultants Ltd. said in a report.

Japanese utilities typically rely more on nuclear power, natural gas and coal for electricity generation because they are cheaper. They make up for shortfalls by burning more oil in power stations. Japan imports most of its low-sulfur fuel oil from Indonesia and Malaysia, Wood Mackenzie said in the report on its website.

Demand for so-called middle-distillate fuels such as diesel, may rise as factories use their generators to provide electricity, according to Akira Kamiyama, an energy derivatives trader at Mitsui & Co. in Tokyo.

Libya Unrest

Heating oil also followed crude oil higher in London on speculation that unrest in Libya will continue to disrupt fuel supplies. Muammar Qaddafi’s forces carried out air strikes against rebels in the town of Ajdabiya.

Brent crude for April settlement fell 17 cents to $113.67 a barrel on London’s ICE Futures Europe exchange. Product futures are vulnerable to changes in Brent because refineries supplying fuel to New York Harbor, the delivery point for heating oil and gasoline futures, process crude grades priced relative to the European benchmark.

Nymex April crude added 3 cents to $101.19 a barrel.

Gasoline slipped amid increased concern that demands from refiners may be reduced.

“There’s worries how much demand is going to get taken out of the market until Japan’s problems get sorted out,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Gasoline for April delivery lost 2.74 cents, or 0.9 percent, to settle at $2.9603 a gallon.

Refinery Rates

Refinery utilization in Japan may fall to about 65 percent following the earthquake, from 88 percent beforehand, Wood Mackenzie said.

Japan is the world’s third-largest crude consumer, using 4.42 million barrels a day of oil in 2010, according to data from the International Energy Agency’s Feb. 10 monthly Oil Market Report. China used 9.39 million and the U.S. 19.25 million, the agency said.

Regular gasoline at the pump, averaged nationwide, advanced 0.1 cent to $3.558 a gallon yesterday, AAA said on its website, the highest level since Oct. 3, 2008.

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