As we noted last Thursday, we are growing uncomfortablewith the precipitous drop in supplies in two key distillate market areas. For starters, the surplus of heating oil supplies (in the East – the largest residential oil furnace market in the U.S. – jumped by 631 bps to 45.1% or 13.4 MMbbls.
That’s the good news, especially given the expected spike in heating demand through the end of this month.
On the other hand, over the last two months the year-on-year surplus of diesel supplies in the Midwest (PADD II) has narrowed from around 25% to 15%. Out West, a 4% surplus has morphed into an 8% deficit.
In light of industry wide efforts to minimize refinery throughput, these recent developments are not to be ignored. As we can see in the Chart of the Day in today’s issue of , per the preliminary numbers from the EIA, distillate fuel supplies in October fell well beyond the error bar of the average movement for the ten-year range ended 2007. In November stocks fell, counter to the historical norm.
For example, over the last 30 Novembers, from 1978 to 2007, distillate supplies increased 24 times, i.e. 4-in-5 years. Last November, at the height of the economic meltdown, stocks surged well beyond the norm as demand dropped. Keep in mind, the overall supply picture for distillate fuels remains quite secure. Yet, regional markets identified above, (intermodal demand for diesel supply in the West and Midwest) are disjointed. Thus, the combination of this event along with the extant pullback in refinery throughput is spilling over into the crack markets.
As we illustrate in today’s issue of , over the last week alone, the NYMEX heating oil crack for February delivery has rallied by 258 bps to a 13½% yield to WTI. What’s more, the spot NYMEX 321 spread (the so-called refiner’s crack) is trending in the right direction as well, up 252 bps over the last week to a net yield of 12.6% to WTI. Both markets are well below their respective seasonal norms, but the recent trend is clear, i.e. crude oil is dear and products are not.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.