Diesel Futures Surge to Four-Month High as Cold Boosts Demand

Jan 24, 2014 4:29 pm ET

Jan. 24 (Bloomberg) -- Diesel jumped to a four-month high as frigid weather across the U.S. Northeast boosted demand for heating fuel oil-fired power generation with supplies in the New York Harbor area at the lowest level in almost six years.

Prices climbed 2 percent, the most since August, as colder temperatures will grip most of the eastern U.S. and Canada through the start of February. The region is expected to be about 8 degrees Fahrenheit (4 Celsius) below normal through Feb. 2, said Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Maryland. ISO New England said oil-fired plants accounted for one-quarter of the region’s power today.

“Utilities are really starting to buy a lot of distillate because of regional natural gas shortages,” Tom Finlon, director of Energy Analytics Group Ltd., said by phone from Jupiter, Florida. “They’re turning to distillate generation and that’s blowing out prices.”

ULSD for February delivery advanced 6.09 cents to $3.1374 a gallon on the New York Mercantile Exchange, the highest settlement since Sept. 6. Trading volume was 45 percent above the 100-day average at 3:56 p.m. Prices rose 3.8 percent since Jan. 17, the largest weekly gain since July 5.

Diesel for prompt delivery in the New York Harbor spot market increased to a 25-cent premium to futures, the largest since May 2008, according to data compiled by Bloomberg, indicating concern that available supplies are limited.

Steeper Backwardation

The February contract’s premium to March futures widened 3.61 cents to 12.16 cents a gallon, the largest backwardation for this time of year since 2000. February diesel and gasoline contracts will expire at the end of trading on Jan. 31.

“We have a lot of winter left,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “When you have weather events, markets can stay in an irrational mode longer than you would expect to be normal because you’ve got emotions trading also.”

Supplies around New York Harbor, the delivery point for futures contracts, slid 6.5 percent to 17 million barrels last week, the least since May 9, 2008, according to Energy Information Administration data. Nationwide, stockpiles slipped 3.21 million barrels to 120.7 million barrels.

Natural gas futures soared 20 percent this week to break above $5 per million British thermal units for the first time in more than three years. Spot gas in New York was $59.98 per million Btu, according to IntercontinentalExchange data, compared with $25.09 for diesel.

Refinery Troubles

Cold weather has already hindered refinery operations, including at PBF Energy Inc.’s 185,000-barrel-a-day Paulsboro, New Jersey, site this week, and continued cold may disrupt other refineries, driving prices higher. Refinery utilization last week fell 3.5 percentage points to a 13-week low of 86.5 percent.

“If the arctic temperatures reach the Gulf Coast and stay cold, you’d expect there will be significant refinery outages that would make the heating oil shortage that much worse,” Finlon said.

Diesel’s crack spread versus West Texas Intermediate crude, a rough measure of refining profitability, increased $1.72 to $30.02 a barrel. The premium over European benchmark Brent gained 74 cents to $18.78.

Stockpiles of gasoil in independent storage in Amsterdam- Rotterdam-Antwerp, the Northwest Europe supply and trading hub, slipped for the first time in three weeks, according to PJK International BV. Supplies dropped 0.8 percent to 1.94 million metric tons (14.6 million barrels) in the week to today.

Late Rally

“Heating oil was late to the rally,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “Then there was a large drawdown in the Northeast and the North Atlantic.”

Gasoline inventories rose 2.12 million barrels to 235.3 million last week, the highest level since February 2011. The increase came as East Coast imports of gasoline jumped 30 percent to 500,000 barrels a day.

Supplies could increase more if winter weather keeps drivers off the road. Schools were closed as far south as the Houston area as temperatures in the fourth-largest U.S. city fell to 29 today when an ice storm moved through the area, according to the National Weather Service. Winter storm and hard-freeze warnings stretched from Texas to Georgia.

Diesel-Gasoline

Diesel’s premium to gasoline increased 5.85 cents to 47.42 cents, the largest since November 2011.

“The spread is very reflective of the fundamentals right now,” Chirichella said. “If it stays cold, we can see the spread go further out. When schools are canceled and businesses are telling employees to stay off work, that will exacerbate the build in gasoline.”

February-delivery gasoline rose 0.14 cent to $2.6632 a gallon on volume that was 11 percent below the 100-day average.

The motor fuel’s crack spread versus WTI grew 72 cents to $15.53 a barrel. Its premium to London-traded Brent crude slipped 26 cents to $4.29.

The average U.S. pump price rose 0.1 cent to $3.288 a gallon, the third consecutive increase, according to data from Heathrow, Florida-based AAA.

--With assistance from Christine Harvey and Naureen S. Malik in New York and Brian K. Sullivan in Boston. Editors: David Marino, Charlotte Porter