9/28/2010 - Heating Oil What Merrill Lynch Is Saying
US heating oil rally relative to gasoline may be premature because it started weeks before a seasonal rise in demand, Bank of America Merrill Lynch said.
“The timing of the heat-to-gas rally, weeks before the actual heating season starts, seems somewhat premature,” Merrill Lynch’s analysts said in the report.
“At $9 a barrel, the premium of front-month heating oil over gasoline appears high, judging
by historical standards.”
Prices for middle distillates, which include heating oil and its European equivalent gasoil as
well as diesel fuel, have risen because of “a number of physical factors,” including
higher-than-normal maintenance at refineries in the US and Europe and strengthening
German demand, according to the report.
“While the Atlantic Basin distillate market will likely remain strong in the very near term, we
could see some weakness this winter,” the bank said.
“Refiners on both sides of the Atlantic are likely to switch aggressively to benefit from the
strong premium on distillates.”
Merrill Lynch said the demand strength has led to front- month gasoil futures on London’s
ICE Futures Europe exchange to flipping into backwardation, “making it the only energy
contract with a premium for immediate delivery.”
Arbitrage exports to Europe, especially from Asia, look set to pick up in mid-October, it said.
Heating oil futures for October delivery traded at $212.75 a gallon, down 0.2 percent, on the
New York Mercantile Exchange on Monday.
Prices have risen 4 percent this month and are up 0.4 this year, according to exchange data.
October gasoline was at $194.58 a gallon.
Gasoil futures for October delivery added 25 cents to $683 a metric tonne on ICE. That
contract was at a premium of $2.25 to November delivery futures. It was at a discount of
$3.25 at the start of this month.
Gasoil futures were last in an extended backwardation in March and early April.
A market is in backwardation when fuel for nearby delivery trades at a higher price than contracts
for shipment in later months. (Bloomberg)
