Schork Oil Outlook: Too Much Distillate in Market?

Earl was a dud, with the brunt of the storm only grazing the New England coast. Be that as it may, the system did take a significant toll on distillate and jet fuel demand as reports came in of numerous regional flight cancellations and train service suspensions up and down the Eastern seaboard.

Therefore, in the short-run chances are that Earl will help soften the blow from the normal seasonal drawdown in ?2 and jet fuel supply that typically begins at the end of this month as refiners ramp-up turnarounds (maintenance season).

As far as distillate fuels are concerned, stocks ended June at 157.9 MMbbls making it the 8th highest June ever recorded (88th percentile) since 1945! As of August 27th the DOE estimates supplies at 175.2 MMbbls. That would be the highest August level since 1981 and the 14th highest since 1945.

In other words, you can’t swing a cat without hitting a barrel of ?2 oil or jet fuel in the US.

Thus, with all of this supply floating around out there, what does this bode for the Nymex heating oil market as we approach the winter? Bear in mind, diesel and jet fuel markets use the Nymex heating oil contract as a proxy hedge. The spot market has been trending higher since May with a series of lows followed by higher lows and highs followed by higher highs. As such, bearish momentum has been stalling in the mid/low 190s in the spot.

Last Tuesday, we saw a nice rally in the market that was backed by heavy volume. The session’s pivot-range was 203.53 to 202.38. Thus, in the near-term that is where we would expect to see support. Failure to hold these levels clear a path back towards the mid/low 190s, i.e. where support has held since the beginning of this year. Thus, this would be a reasonable area to expect support on the next downturn.

What about the upside for heating oil this winter? For the week ended May 07th, the spot June contract plunged 12.8% (peak to trough) on very heavy volume. We will look for initial resistance in the spot market in between the pivot-range for that week, 212.20 to 220.71. Granted, that is rather wide.

When we look to the end of the winter, a significant gap opened in the Mar’11 contract back at the beginning of last month. On August 11th the contract posted a 221.50 low print and the following session the contract only got up to 218.44. Therefore, on any upside momentum the bulls will endeavor to close this gap.

But, if they close the gap can they keep it up there? Based on the relationship between heating oil and WTI values this year, 221.50 heating oil translates into around 83.50 crude oil. This is an area were crude oil bulls have consistently failed at over the last year, and it is an area where we analysts at The Schork Report are expecting that they will do so again this winter, as well.


Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.