LONDON/NEW YORK U.S. heating oil and European gas oil futures have surged this month, outpacing gains in gasoline and smashing through key technical resistance even though global supplies of the winter fuel are plentiful.
Prices have got a boost from U.S. data showing heating oil inventories in the world's top consumer have slid throughout most of this year, leaving stocks more than a third below year-ago levels and raising concern about winter fuel supplies.
But while the U.S. Department of Energy data reflects an increasingly small segment of the U.S. heating oil market after the latest tightening of fuel quality rules earlier this month, some analysts remain concerned that inventories may have fallen too far to replenish in time for winter.
"I know people are taking comfort in the fact that demand is being siloed into residential heating oil demand, but the real test will come later this year," said John Kilduff, senior vice president at Man Financial.
"Year-on-year and multi-year lows are lows and since heating oil is a NYMEX futures it gets reflected in prices."
NYMEX heating oil futures have risen almost a tenth since June 1, breaking above technical resistance at $1.96 a gallon, and narrowing their discount to gasoline futures by more than two thirds.
Technical analysts pegged the next resistance level for heating oil at $2.10 a gallon, before the contract challenges last year's high of $2.17, and then the record high of $2.21 posted in 2005.
Front month heating oil rose as high as $2.0710 a gallon on Thursday, before easing to $2.0495 a gallon at 1601 GMT, up 0.8 percent from the previous session.
London ICE gas oil futures have similarly gained almost eight percent this month, boosting their premium to Brent crude to their highest since October last year.
STOCKS SITUATION NOT SO DIRE
But some analysts are less certain that the inventory situation is so dire.
From June 1, U.S. heating oil stock data excludes fuel inventories for non-road diesel-powered engines after the introduction of rules tightening maximum sulphur content in that segment of the market to 500 parts per million from 3000 ppm previously.
With only distillate fuels with sulphur content above 500ppm categorized as heating oil, that non-road fuel part of the market is now included in low-sulphur diesel stock data.
"This means that comparing high-sulphur distillate fuel inventories to historical data, such as a 5-year average, will be misleading, as the high sulphur market is dramatically smaller now compared to recent years," the U.S. Energy Information Administration said this week.
If desired inventories are proportional to demand, it would not be surprising to see half of the high-sulphur distillate fuel inventories shift to lower sulphur categories, it said.
Recent U.S. stock data points to just such a trend.
While heating oil stocks have slumped, inventories of higher-quality diesel with up to 15ppm sulphur content have risen almost fourfold in the past year, leaving total distillate stocks down just 1.4 percent from a year ago.
"Trading a bullish heating oil position only on the basis of a comparison of DOE historical high sulphur stocks includes a serious data risk," Olivier Jakob, managing director at Petromatrix said in a daily report.
At the same time, while U.S. refineries have struggled to boost production after an unusually long season of maintenance, partly because of the tighter fuel quality rules, any heating oil supply shortage could easily be met by brimming supplies elsewhere, analysts and traders said.
European distillate stocks last month stood almost 25 million barrels, or 6.4 percent, above year-ago levels. In Germany, the region's largest heating oil market, storage tanks are so full that traders are moving barrels out of the country.
At the same time, tighter fuel quality rules for European heating oil from next year could force suppliers of higher sulphur Russian gas oil to look beyond the region to place surplus barrels.
Cargoes of the Russian fuel already regularly head for the U.S. during the northern hemisphere winter.
"The strength of the easier-to-make product in the middle of the summer is remarkable, when you have a surplus of it in the former Soviet Union, and you don't know what to do with it in Europe," a regional trader said.
"I would be surprised if that low U.S. stocks would support the market, that one fact."