Heating oil refining profit soars

New York :  The profit from turning crude into heating oil and diesel fuel has jumped to almost double that for gasoline as US exports to Europe and South America climb.

Heating oil futures on the New York Mercantile Exchange, which trade as a surrogate for diesel, increased 13 per cent in the third quarter, helping to drive the profit from producing heating, industrial and trucking fuel to almost three times what it was a year ago.

"It's reflecting something of real value," said Ed Morse, head of commodities research at Credit Suisse Group AG in New York. "Diesel demand is strong, heating oil as well. Europe is structurally short of distillate for the winter."

Exports to Europe and South America are being bolstered by evidence that growth in some of the continents' biggest economies is accelerating.

Gross domestic product in Germany, Europe's biggest consumer of heating oil, will expand 3.4 per cent this year, according to the European Commission. Argentina's will increase 8.3 per cent, the median of eight analysts' estimates compiled show.

Crack spread

The profit from refining crude into heating oil, the so-called crack spread, climbed to $13.70 (Dh50.3) a barrel as of Wednesday, based on Nymex futures, compared with $7.32 for gasoline. The corresponding spreads were $5.32 and $3.57 a year ago. On ICE Futures Europe, the margin for gasoil, the equivalent of heating oil, was $12.47 a barrel, compared with $8.82 a year ago.

The supply of gasoil in independent storage in Europe's Amsterdam-Rotterdam-Antwerp oil-trading hub has fallen to the lowest level since July, PJK International BV said, reflecting the region's growing use of the fuel.

Diesel demand in 16 Eur-opean Union countries this year will be about 3.68 million barrels a day, up from 3.6 million in 2009, according to Andrew Reed, an analyst at Energy Security Analysis Inc. in Massachusetts. In June, July and August, demand for heating oil in Germany was 387,000 barrels a day, up from 255,000 a year earlier, Reed said.

"Demand for diesel and heating oil in northwestern Europe came roaring back this year," Reed said. "The US has a lot of low-sulphur diesel."

Shipments to Europe are also growing as traders seek to profit from price differences between the two regions through a so-called open arbitrage. Ultra-low sulfur diesel in the Gulf Coast spot market averaged $2.1489 a gallon, or about $676.81 per metric ton, in September, compared with $693.48 for cargoes delivered into Northwest Europe, according to data compiled by Bloomberg, while freight costs were about $11.75 per ton.

"There are a number of cargoes going to Europe from the Gulf Coast," said Andrew Lebow, senior vice president for energy at MF Global Inc. in New York. The arbitrage to Europe "is open and when you get a window, you take advantage of it," he said.

Diesel focus

The heating oil crack spread may narrow once European and US refineries increase rates by the end of this month and focus on producing diesel, according to James Cordier, portfolio manager at OptionSellers.com. The difference between Nov-ember heating oil and gasoline was 15.19 cents a gallon Wednesday, after reaching a 13-month high of 20.73 cents on October 1.

"The 20-cent difference is probably about as wide as it can get," said Tampa, Florida-based Cordier, who manages more than $100 million. "The harvest season and maintenance season will be over. But this rally has a little bit of legs yet."

Between 45 per cent and 47 per cent of US oil is refined into gasoline, said Andy Lipow, president of Lipow Oil Associates LLC, a Houston-based energy consultant. Between 25 per cent and 29 per cent is turned into distillate.

"You can adjust one at the expense of the other while staying within those ranges," Lipow said. "In 2008, they went to 29 per cent distillates in some of the months" when the heating oil crack spread was more than $36 a barrel.

About 328,000 barrels a day of refining capacity has been offline in Europe this quarter, compared with 206,000 last year, according to Bank of America Merrill Lynch data. In the US, about 465,000 barrels a day of capacity was out of action, versus about 304,000 a year earlier.

"We'll have a couple more weeks of good times," said Francisco Blanch, a commodity strategist at Bank of America Merrill in London.