US Products Outlook-Heatoil steady as supply covers demand

NEW YORK, Jan 26 (Reuters) - Heating oil differentials in the New York Harbor are seen steady this week amid a tug-of-war between ample supplies and rising demand due to a cold snap in the Northeast, traders said on Monday.

"It will hold," one distillates trader said of the near-term outlook for heat oil. "There's plenty of supply and a (February) warming trend is supposed to be heading this way."

But for this week, DTN Meteorlogix said Northeast temperatures will be below normal Tuesday and Wednesday and near to below normal Thursday to Saturday. [ID:nDTN244]

The National Weather Service forecast in its weekly report that U.S. heating demand this week will average 5.4 percent above normal as cold weather permeates most of the country. Demand for heat oil, the favored heating fuel of the Northeast, is seen 10.3 percent above normal this week. [ID:nN26371787]

But despite the cold-induced rise in demand, heat oil differentials in NY Harbor fell half a penny at 1.00 cent over futures on Monday, with traders citing plenty of supply to meet any demand rise as well as an early February warming trend.

NYMEX front month heating oil futures were up, but lagging bigger percentage gains in crude oil futures.

"The heating oil market has returned to functioning as the weakest segment of the petroleum complex, with forecasts for a warming trend into early February tending to weigh on the heating oil crack spread premium over crude oil this morning," Tim Evans of Citi Futures Perspective said in a note.

The March heating oil crack spread CL-HO1=R was $13.52 on Monday, down from a high of $27.81 earlier this month.

Distillate values are also pressured by a boost to distillate supplies from a slide in trucking activity over the past six months that has hit diesel use. The past few government weekly oil data reports showed big distillate builds despite cold weather boosting heat demand.

According to the Energy Information Administration (EIA), U.S. stocks of distillates -- which include heating oil, diesel and jet fuel -- rose to 145 million barrels in the week to Jan. 16, up 11 percent from 130.6 million in the week to Dec. 5,2008. Supplies are up 13 percent from a year ago.

The latest EIA data showed that heating oil inventories in PADD 1, the East Coast, are 8.6 percent above a year ago.

One market watcher said Gulf Coast and NY Harbor inventories of distillates like ULSD were at a "near record."

Ultra-low sulfur diesel differentials in the Midwest are also likely to continue to stay flat to lower as supplies outweigh thin demand, traders said.

Traders also said jet fuel values in the Harbor may come under further pressure following a big drop at the start of the week as plentiful inventories weigh on values.

But oil products price differentials could find some support soon from the start of the first quarter refinery maintenance season.

Valero said it will shut its 245,000-barrel-per-day refinery in Texas City, Texas, during a 40-day planned maintenance on a crude unit and a coker starting this week.

Valero said it decided to shut the refinery, including the gasoline-making fluid catalytic cracker, partly for economic reasons because of weak motor fuel margins. [ID:nN26374065] (Reporting by Haitham Haddadin and Rebekah Kebede)