El Nino, Sluggish Freight Upend U.S. Heating Oil Market

Heating oil prices in the United States are trading as if it was mid-summer rather than winter, as warm weather and sluggish demand from freight companies combine to make heating oil cheaper than gasoline.

Heating oil normally trades at a substantial premium to gasoline in winter and then moves to a discount during the second and third quarters as heating demand fades and the summer driving season ramps up.

But this winter, heating oil is trading at the sort of discount normally only seen between March and July as heating demand fades away and refiners prepare for the summer gasoline campaign. (http://tmsnrt.rs/1R6W2C9)

On Dec. 31, the front-month futures price of heating oil closed at $1.10 per gallon, a discount of almost 17 cents to the futures price of gasoline.

It was the largest seasonal discount for more than a decade and compares with a normal premium of around 26 cents per gallon at this time of year.

Consumption of distillate fuel oil, used in trucks, trains and ships, and to heat homes and office buildings, is down by more than 450,000 barrels per day, 11 percent, compared with the end of 2014. (http://tmsnrt.rs/1R6Wd07)

Warmer-than-normal weather since October due to El Nino has cut heating demand by around 25 percent according to the U.S. National Oceanic and Atmospheric Administration. (http://tmsnrt.rs/1R6W4Ke)

And freight movements by road, rail, barge and pipeline have been essentially flat for the last 12 months after five years of strong growth, according to the U.S. Bureau of Transportation Statistics. (http://tmsnrt.rs/1R6Wct7)

Freight is being hit by the shift from coal to gas in power production, the end of the U.S. oil drilling boom, and over-ordering by retailers and wholesalers earlier in the year, which has left them trying to cut excess stocks.

Despite weak demand, the supply of distillate fuel oil is increasing because U.S. refineries are processing crude oil at a seasonal record high to meet strong demand from motorists for gasoline.

Strong gasoline margins are incentivising refiners to produce as much as possible, making excess distillate as an unwanted co-product.

U.S. refiners produced 5.5 million barrels per day of distillate in the four weeks leading up to Christmas, up from 5.25 million in the prior-year period, according to the U.S. Energy Information Administration.

Since the beginning of the oil boom, U.S. refineries have increasingly turned to exports to dispose of excess production of distillate fuel oil.

But with warmer-than-normal weather across most of Europe and northeast Asia, it is proving difficult to export any more of the surplus.

Distillate stocks are 27 million barrels, 22 percent higher than at the same point last year. (http://tmsnrt.rs/1R6WfVT)

Distillate fuel oil is the most oversupplied part of the fuels market. With the effects of El Nino likely to linger well into the first half of 2016, that overhang looks set to remain for some time.

In contrast, gasoline stocks are more than 7 million barrels, or 3 percent, lower than at the end of 2014, and the market looks balanced.

By John Kemp