Diesel Falls Most in Three Weeks as Cargoes Replenish Supplies

Jan 27, 2014 4:07 pm ET

Jan. 27 (Bloomberg) -- Diesel sank the most in three weeks on speculation that cargoes arriving in the northeast U.S. will replenish supplies that were drawn down to the lowest level in almost six years when frigid cold gripped the region this month.

Futures tumbled 1.4 percent after touching the highest level since Aug. 30 and the spot market weakened in New York Harbor, indicating less concern that supplies for prompt delivery would be scarce. Commodity Weather Group LLC in Bethesda, Maryland, projected average or higher-than-normal temperatures from Florida to Maine Feb. 1 through Feb. 10 after frigid weather this week.

“A significant amount of resupply will show up in New York Harbor in February because the price is so high it is drawing cargoes,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Ultra low sulfur diesel for February delivery fell 4.5 cents to settle at $3.0924 a gallon on the New York Mercantile Exchange. It was the biggest drop since Jan. 2. Trading volume was 54 percent above the 100-day average as of 3:39 p.m. February diesel and gasoline contracts will expire at the end of trading on Jan. 31.

March, the most active contract, slipped 4.91 cents to $2.9667. The premium of February over March increased to 12.57 cents, the largest backwardation since March 31, 2008.

Diesel rose as high as $3.1835 earlier as the near-term forecast is supportive of higher prices. “A very strong cold front will be bringing frigid conditions back to the central and eastern U.S.,” according to the National Weather Service. Subfreezing highs are expected “well into the Deep South,” with snow, sleet, and freezing rain expected by tomorrow near the Central Gulf Coast and becoming heavier over the Carolinas.

Spot Market

Prompt-delivery diesel in the New York Harbor spot market weakened today for the first time in three weeks, sinking 0.5 cent to 24.5 cents a gallon over Nymex futures as of 3:19 p.m., according to data compiled by Bloomberg.

“People were clearly holding on to inventories and the cash market was 30 cents over earlier today,” said Andrew Lebow, a senior vice president at Jefferies Bache LLC in New York. “It’s certainly overbought by any measure and there may be some barrels arrived from Europe. We’re also getting into expiration.”

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

Tight Inventories

“Heating oil was up where it was because of its tight inventories,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Economic reports indicate that without weather-driven demand, consumption may struggle domestically and globally. Sales of new U.S. homes slid 7 percent in December, Commerce Department data shows. A private gauge of China’s manufacturing dropped to a six- month low in January.

“It may have just got a bit overbought and the forecast for the Northeast does moderate a lot once you get past the weekend,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “The macroeconomic downdraft doesn’t help.”

March-delivery diesel’s crack spread versus West Texas Intermediate crude, a rough measure of refining profitability, narrowed $1.14 to $28.88 a barrel. The premium over European benchmark Brent fell 87 cents to $17.91.

February-delivery gasoline fell 4.15 cents, or 1.6 percent, to settle at $2.6217 a gallon on volume that was 16 percent below the 100-day average. March gasoline slipped 3.77 cents to $2.6329 a gallon.

The motor fuel’s crack spread versus WTI narrowed 66 cents to $14.86 a barrel. Its premium to London-traded Brent crude slipped 40 cents to $3.89.

The average U.S. pump price fell 0.3 cent to $3.282 a gallon, the third consecutive decrease, according to data from Heathrow, Florida-based AAA.

--With assistance from Mike Anderson in Singapore. Editors: David Marino, Bill Banker