US Products Outlook-Distillates weak; cold supports heatoil

NEW YORK Oct 12 (Reuters) - Cash distillates are due to weaken this week, weighed by supplies at a 26-year high, but New York Harbor heat oil is in a tug of war between burgeoning inventory and a demand lift from a cold snap, traders said.

"Get the ear muffs out. Oil bears get frosted as cold temperatures give the energy complex a Columbus Day boost," said Phil Flynn, analyst at PFGBest Research in Chicago.

"Stunning records for cold were set across the nations, increasing the demand for heating fuels over the weekend," Flynn added.

The U.S. National Weather Service said demand for heating oil, the favored fuel in the northeastern United States, is seen 43 percent above normal this week. [ID:nN12134969] Northeast temperatures are set to average near to below normal through Friday, said forecaster DTN Meteorlogix. [ID:nDTN641]

Cash heating oil values in the New York Harbor eased marginally at the start of the week as benchmark November heatoil futures HOX9 rallied nearly 3 percent on what analysts said were expectations of higher weather-related demand.

"Heating (oil) should hold for the week," one cash distillates trade in the NY Harbor said in his outlook.

"Need sustained (low) temperatures for a while before it would facilitate a draw, we're still seeing plenty of supply out there," he added.

The latest government data shows U.S. supplies of middle distillates -- which include diesel and heating oil -- rose to a fresh 26-year high of 171.8 million barrels in the Oct. 2 week, 40 percent higher than a year ago. Heat oil stocks rose 400,000 barrels to 51.6 million, up 33 percent from a year ago.

OFF TO A GOOD START

"This heating season is getting off to a good start," said Stephen Schork, Editor of the Schork Report.

But he said in a report that high sulfur distillate stocks in the East Coast (PADD I) are teeming, with the year-on-year surplus ballooning to 54 percent or 15.2 million barrels.

Gulf Coast distillates differentials are expected to remain weak as the supply overhang continues to dwarf demand and refinery run rates are seen inching up.

The arbitrage window closed between the region and Northwest Europe as refinery cuts there have not yet kicked in enough to pull barrels from U.S. Gulf.

European traders say distillate barge differentials to the gas oil contract LGOc1 are at three-month highs due to refinery cuts and seasonal maintenance, though barge loading restriction caused by low Rhine water levels have been bearish as they keep stocks shut in Amsterdam-Rotterdam-Antwerp hub.

NY Harbor traders said ultra-low sulfur diesel values in the hub were due to weaken in line with the U.S. Gulf Coast.

"ULSD looking to get weaker off of USGC. It's better offered in USGC so weakening in NYH as well ," a trader said.

In the U.S. Midwest, the outlook for ultra-low sulfur diesel demand remains bleak, with cold, wet weather making conditions unsuitable for corn and soy harvest.

As a result, differentials for the fuel are likely to remain steady to lower, Midwest traders said.

"The weather pattern will remain unfavorable for crop drydown and the harvest," DTN Meteorlogix said. [ID:nDTN639]

Freezing temperatures in the western Midwest may also damage immature crops, the forecaster said.

GASOLINE TO DRIFT LOWER

Gasoline differentials in the Gulf Coast, which got a bit of a bump up last week on refinery snags, are seen slipping back into negative territory as the cold weather sets in and begins to curtail demand for driving.

In the Midwest, gasoline values may drift lower until the regional markets see the effects of refinery down time due to poor margins, one broker said.

Though U.S. gasoline imports rose in the Oct. 2 week to 1.011 million barrels per day from 851,00 bpd the prior week, European traders say the arbitrage to the United States is still not looking particularly strong for exports short-term.

But traders shouldn't make a loss, keeping cargoes moving as a "delivery point of last resort", according to one player.

Further down the curve, swaps brokers are reporting a lot of action on the spread between Dec and April, which is weakening as April gets stronger, as traders now pin hopes on a resurgence in spot exports in the second qurater of 2010, with demand picking-up alongside a broader economy. (Reporting by Haitham Haddadin, Janet McGurty and Rebekah Kebede; additional reporting by Gene Ramos in New York and David Sheppard in London)