US Products Outlook- Extreme NE cold to boost heating oil

NEW YORK Jan 12 (Reuters) - New York Harbor heating oil is seen firming this week as an arctic cold snap brings some of the coldest temperatures of the season to the U.S. Northeast and boosts demand for heating fuel, traders said on Monday.

According to the National Weather Service, U.S. heating demand this week is expected to average 7.7 percent above normal as a mass of cold air drops into the northern part of the country from Canada. NWS said demand for heating oil, the favored heating fuel of the Northeast, is seen about 13.7 percent above normal this week. [ID:nN12314387]

"Key heating oil markets in the Northeast are expected to get hammered this week," Stephen Schork, editor of The Schork Report, said in a report in reference to the looming cold.

"For instance, for this Thursday and Friday in New York city highs are forecast at around 16 F(-9 C). That is 59 percent below normal January maximum temperatures," he added.

Oil traders said that heating oil cash differentials in the New York Harbor moved higher on Monday on the offer side to 0.75 cent over benchmark February NYMEX heat oil futures, up from evens to the print on Friday.

"Off of cold weather, it should continue to firm up over the week. We are hearing high of 14 F by Friday in the tri-state area," a distillates trader told Reuters, referring to the New York, New Jersey and Connecticut region.

While still higher than year-ago levels, heating oil supplies in the PADD I East Coast region fell slightly in the week ended Jan. 2 to 28.3 million barrels but in PADD Ib region which includes New York Harbor, stocks fell more than 6 percent to 18.1 million barrels, according to government data.

In its extended forecast, private forecaster DTN Meteorlogix said Northeast temperatures, which were below normal Friday through Sunday, will continue over the next 10 days, averaging 15-20F (8-10C) below normal Thursday and 16-22 F (8-11C) below normal Friday. [ID:nDTN625]

The extreme cold follows a weekend storm which blanketed wide areas in Northeast and the Midwest with snow.

"In the upcoming week, the East will get blasted with the coldest air of the season so far," forecaster Accuweather.com said on its Website.

Despite the expected cold, February heating oil futures fell 2.5 percent at $1.4504 a gallon on Monday as crude oil futures sank $3, or 7 percent, to below $38 a barrel.

"The market chatter is all focused on demand weakness, which seems somewhat at odds with reality, given that temperatures are expected to be extremely cold the next few days in the Midwest and Northeast," noted Tim Evans, an analyst at Citi Futures Perspective.

Cold snaps of this magnitude can produce total distillates demand of 4.6-4.7 million million barrels per day which would be a clear step higher from the recent four-week average of 4.205 million bpd, he added in a report.

"This divergence between the actual demand and price action suggest that the market could turn easily back to the upside once the cold does translate into stronger demand statistics and a drain on inventories," Evans added.

Meanwhile, cash gasoline was likely to be capped in the Harbor amid a 10 percent build in regular gasoline stocks in PADD I region to 26 million barrels in the Jan. 2 week.

Buying interest for Midwest ultra-low sulfur diesel was expected to remain thin this week, with Magellan inventories far above what they were last year.

"No interest, can't see basis rising this week," said one Midwest trader.

However, some Midwest players are buying barrels for the spring agricultural, taking advantage of a contangoed market which encourages storing barrels for later sales at higher prices, traders said.

"There's nothing to support the Midwest diesel except the ever present carry in the market," said one Midwest broker. (Reporting by Haitham Haddadin and Rebekah Kebede)