Heating oil futures have built a nearly 10-cent premium over gasoline on the New York Mercantile Exchange --extremely unusual heading into the summer driving season -- and experts are wondering if soaring global demand for distillates could make this anomaly into a trend.
The unseasonal focus on heating oil futures, the benchmark contract for all distillates, comes amid strong global demand for diesel and jet fuel in the United States, Europe and Asia.
The July heating oil futures contract settled on Monday at $1.6165 per gallon on the NYMEX, capping a nearly 20 percent rise over the past two weeks, while July gasoline settled at $1.5295 a gallon.
That much of a premium for heating oil would be unusual even for winter, when homeowners and businesses crank up their furnaces, but shocking for the July contract, when U.S. gasoline demand normally peaks and heating demand falls.
U.S. distillate demand has been growing roughly three times faster than gasoline demand, according to the U.S. Energy Information Administration, due in part to diesel demand from the trucking industry and jet fuel demand from airlines.
Europe has also been boosting diesel demand as the favored fuel for its automobile fleet, while rapid economic growth in China and India have added to the strain on stockpiles.
“Probably the markets are looking ahead to the next strong distillate season in fourth quarter 2005 and first quarter of 2006,” said Dave Costello, an economist with EIA which is the statistical arm of the Department of Energy.
NYMEX heating oil futures are not too far below the record of $1.695 a gallon reached on April 4 -- the same day crude hit its peak over $58 a barrel.
Some analysts, however, are skeptical that the fundamentals for the distillates market warrant the unseasonal premium for heating oil futures over gasoline because supplies are healthy and strong prices may slow demand.
“I, again, saw no particular news behind the market’s movement today,” wrote Tom Mooney at Southeast Energy Inc. in a report Monday afternoon. ”Saw more of the same talk of ’concern’ about winter fuels being ’tight’ or ’short,’ as ’refiners have to concentrate too much on making gasoline to fuel the summer,’ or ’refining capacity is very tight.’ That kind of stuff. In other words, nothing that I think is likely at all to be valid.”
U.S. distillate stocks are in the lower half of the average range for this time of year at 106.4 million barrels, but remain 400,000 barrels above their level of a year ago, according to the most recent EIA data.
Heating oil stocks, meanwhile, are holding a 2.8-million-barrel surplus to last year -- when heating oil futures were hovering below $1.00 a gallon, 20 cents below gasoline’s price.
Gasoline inventories, meanwhile, are 12.7 million barrels higher than last year and crude supplies are 32.6 million higher, according to EIA data.
“We got to Memorial Day and the driving season and now the funds are shifting their focus earlier than usual from gasoline to distillates, where supplies are tighter,” said Mike Fitzpatrick, vice president for energy risk management at Fimat USA.
But speculators may be forgetting that the diesel demand helping to fuel high prices is historically much more sensitive to high prices than gasoline demand.
Industry group the American Trucking Associations, which tracks truck tonnage volumes, has recorded three consecutive monthly decreases through April. The decreases, which ATA said mirrored the economy’s deceleration, have slowed the year-to-date tonnage growth to 3.7 percent from 2004’s 5.7 percent growth rate.
In a Monday research note, Fimat’s Fitzpatrick pointed out that, “In a downturn, the volume of goods to be shipped over the road will decline and people will postpone vacations, but they still have to heat their homes.”
