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Winter Fuels Still Heating Up Bigger Pay Days

Friday, 7 Mar 2008 | 3:11 PM ET

This is the time of year that refiners usually start to make the switch from making winter fuels (distillates, winter grade gasoline) to summer grade gasoline. It's doesn't require major unit shutdowns to make this switch, I am told.

Nowadays it's as easy as turning a few knobs. But this year, refiners aren't jumping to make the switch. The bigger payday comes from maximizing distillate production right now--even though winter is nearly over.

Why? Just take a look at the divergence in heating oil and gasoline prices. They tell the whole story. Heating oil futures have been trading 25-30 cents higher than reformulated gasoline all day long--and heating oil is trading higher than RBOB futures until the end of 2008. Energy analyst Andy Lipow says that's why refiners are operating to maximize distillate production, which includes making diesel and jet fuel.

Diesel prices have been soaring thanks to a shortage of the fuel in Europe and increasing demand from India and China. Here in the U.S., retail diesel prices are 60 cents higher per gallon than unleaded gasoline. At $3.74/gallon, diesel prices are more than a dollar higher than they were last year, setting new records on a daily basis.

OPIS analyst Tom Kloza says we could easily see $4 gallon diesel prices this summer, but may not necessarily reach that mark at the gas pump. Some stations may sell $4 gasoline, but Kloza says consumers usually start to walk or carpool or cut back on their driving in other ways when gasoline hits $3.25 a gallon.

The national average for regular unleaded is $3.19/gallon heading into the weekend, according to AAA, and demand has already tapered off in recent week. While we're not in the peak summer driving season, gasoline supplies are plentiful--at a 14 year high! Kloza says pump prices will probably top out at $3.50-$3.75 and then start heading lower.

Not great news, but it could be worse.

Questions? Comments? energysource@cnbc.com