US should reduce distillate stocks

Sam Fletcher
OGJ Senior Writer

The US needs to “export more distillates or cut refinery production” before Gulf Coast stocks become “difficult to manage,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

US distillate inventories are at multiyear highs and still increasing, up 1 million bbl to 165.8 million bbl in the week ended Jan. 14. Gulf Coast refineries ran at high levels in December. “But capacity utilization is starting to come off after a rapid build of product stocks,” Jakob said.

Meanwhile, in the 4 weeks ended Jan. 14, the latest data available at presstime, implied US demand for gasoline, distillates, and jet fuel was 2.2% higher than a year ago, but 5.9% lower than in 2008 and 1.4% lower than in 2009, Jakob reported.

Among petroleum products, “the light-heavy spread has widened dramatically as reflected in the gas oil premium to fuel oil, propelled by colder-than-normal weather across the northern hemisphere,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC. “We had predicted this based on the expectation of a structural widening of the spread in line with forecasts for global economic growth this year that would boost demand for gasoil at the expense of fuel oil.”

Still he said Jan. 21, “Heating oil returns have increased 1.4% over the past week and 4.3% year to date to be the best performer of the Deutsche Bank Liquid Commodity Index,” Sieminski said. With prospects for cooler than normal temperatures for the rest of the winter, he said, “We expect prices to remain firm. In contrast, crude oil has posted a negative 1.1% return last week as the forward curve remains in contango.”

December data for Germany showed the impact of snow disruptions, with gasoline sales down 8%. “Diesel was, however, still above last year (up 2.1%) and heating oil sales in Germany were pretty strong in December (up 33% from a year ago),” said Jakob.

“For the year, German sales of heating oil were 4.3% higher than in 2009, diesel was higher by 3.7%, and gasoline was down 2.6%,” he reported. In France, diesel sales increased 2.1% last year, while gasoline was down 6.2%. Gasoline sales in Italy were down 5.9% for 2010, with diesel down just 0.5%, he said.

Swap dealers
Jakob pointed out structural changes last quarter in financial flows into West Texas Intermediate “where swap dealers (mostly commodity Wall Street banks) were using the oil rally to reduce their long exposure to WTI,” a fact confirmed by some banks in their quarterly reports.

At the time, swap dealers were “mostly all in agreement” that benchmark crude should be trading above $100/bbl on the New York Mercantile Exchange. But over the course of the market rally, they have gone “from being the main long in the market to being fully neutral,” Jakob said.

“Swap dealers have been able to unwind some of their WTI length into hedge funds during the fourth quarter and with hedge funds now holding record length in WTI, the question remains: to whom can the hedge funds unwind their WTI length if the swap dealers for whatever reasons strongly believe that crude should be at $100 /bbl but do not want to hold length into it?”

According to Jakob, large speculators face a choice of rolling their record length in WTI at 1.65% monthly cost (20% annualized) or move their investments to North Sea Brent crude to avoid the WTI contango rolling cost. Although he advocated moving from WTI to Brent in 2010, Jakob said, “To move now with Brent at a $7/bbl premium to WTI does not come without risk.”

He said, “While we see a lot of reasons why Brent should be at a premium to WTI, with lower European cash differentials and European refineries moving into maintenance season, we still do not see the inputs from the cash markets validating that the Brent futures premium to WTI should be as wide as $7/bbl.”

(Online Jan. 24, 2011; author’s e-mail: samf@ogjonline.com)

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