US Cash Products-Diesel moves to the forefront

NEW YORK Oct 6 (Reuters) - Cooler weather and the fall harvest has sparked interest in distillates but differentials were mixed despite a falling benchmark as waning demand is keeping buying thin, traders said on Monday.

"Fundamentals are now becoming clearer for the U.S. market and they are clearly bearish," said one Midwest trader.

"Refinery production is finally returning to more normalized levels after the hurricanes and this should only increase inventories in a time where demand is extremely poor."

Gasoline differentials continue to fall dramatically, declining despite the weak futures benchmark.

Refinery restarts after Hurricane Ike continue to ramp up and add more barrels to ample supply, traders said.

Pasadena Refining said on Monday it would restart the gasoline-making fluid catalytic cracking unit at its 100,000 bpd refinery on the outskirts of Houston. [ID:nN06376699]

For a list of refinery outages and restarts, click [REF/US]

U.S. crude futures fell more than $5 at just below $89 per barrel on Monday as the financial turmoil spreading to Europe fueled more concern about slow global oil demand. [O/N]

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Prompt cycle 57 transitional M3 conventional gasoline traded at 3.50 cents over the November RBOB screen, with offers seen at 4.00 cents over, down considerably from the 5/6 cents over seen Friday.

Conventional winter grade M4, which was seen at 5 cents over the November screen on Friday, slipped to talk at even or a 0.50 cent regrade to M3, putting outright levels at 3.50/4.00 cents over the screen, on par with M3.

Diesel values were flat, despite a falling heating oil benchmark, with 61 grade pegged at 9.50/10.00 cents over the screen as harvest demand in the Midwest is seen pulling barrels up the Explorer and other regional pipelines.

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M4 conventional regular traded at 6.75 cents over the sharply lower November RBOB NYMEX futures, then reoffered at that level, down from Friday's 7 to 9 cents over for barrels by Oct. 10.

Among the premiums, V4 offers lost two cents at 40 cents over and H4 offers were down a penny at 35 cents over.

Adding to last week's gains on the back of limited supply, ULSD rose half a cent with offers at 18 cents over the lower benchmark November heating oil futures but traders said the rally was likely nearing its end with more product expected soon from the Gulf Coast.

Heating oil was steady to a quarter cent firmer at 3.25 by 2.75 cents under the benchmark NYMEX screen.

Jet fuel was flat with trading at 22 cents over for dead prompt Buckeye Pipeline barrels, the traders added.

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Group Three gasoline traded at 9.50 cents over the Nov. RBOB futures, about a cent lower than Friday levels.

In Chicago, gasoline for newly prompt cycle 2 was pegged at 26.75 cents over the Nov. RBOB contract, after cycle 1 gasoline shot up to 38 cents over on Thursday and Friday in an end of cycle rally.

Ultra-low sulfur diesel in Group Three was pegged at 27/27.50 cents over the Nov. heating oil board, down about half a penny.

Cycle 2 ultra-low sulfur diesel in Chicago was pegged at 23 cents over Nov. futures, slipping a cent from Friday. (Reporting by Janet McGurty, Haitham Haddadin and Rebekah Kebede)((janet.mcgurty@reuters.com; +1 646 223 6093; Reuters Messaging: janet.mcgurty.reuters.com@reuters.net))