Heating oil leads energy complex higher

The Heat is On!

Just when the market was focused on gasoline supply, it was heating oil that led the energy complex higher. A surprise drawdown in the distillate category of 2.0 million in the Energy Information Agency report and expectations of rocketing demand from China and India caused heating oil to take center stage putting the RBOB gasoline in the back seat.

China's worst drought in over 50 years is wrecking havoc in the country and warnings about electricity shortages is causing the Chinese to choose food and drinking water over hydroelectric power. Yesterday China made a decision and according to the Guardian Chinese Government, they will release 5 billion cubic meter of water a day until June 10 from the "Three Gorges" reservoir. The Guardian says that this drastic measure comes amid warnings of power shortages and highlights the severity of the dry spell in the Yangtze delta, which supports 400 million people and 40% of China's economic activity. From January to April, the worst hit province of Hubei has had 40% less rainfall than the average over the same period since 1961. Shanghai, Jiangsu and Hunan are also severely affected.

For heating oil traders, this was another sign that demand for diesel will be higher than anticipated. Factories will look to diesel generators to lessen the impact from power shortages and rolling blackouts. They will also be competing with India for supply. The Economic Times reports that diesel demand in India will surge this summer as subsidies make it cheaper than fuel oil for burning in power plants and factories, potentially tightening distillate supplies in Asia if New Delhi does not act soon to raise local tariffs.

The Economic Times says that India caps prices of diesel, the most common fuel for transport and its large farm sector, to protect the poor and control inflation. Fuel oil is sold at international rates, which are close to their highest since 2008. The distortion in the relationship between fuel oil and diesel may result in the nation's diesel imports rising by as much as 30 percent on the year at a time when supplies in Asia are expected to be thin as China clamps down on exports to meet a surge in summer demand.

They also say that the International Energy Agency sees India's diesel demand rising 6.3 percent this year to 1.3 million barrels per day (bpd), while fuel oil demand is seen falling 5.4 percent to 368,000 bpd. But with fuel oil prices rising above diesel, those trends could be exacerbated. Fuel substitution has already propelled a sharp acceleration in diesel demand growth in May to around 15-18 percent from a year earlier. That was up from growth in diesel sales of just 1.7 percent in April.

So the combination of the China’s opening of the Three Gorges and the drawdown in distillates helped support the market. Still the good news was that gasoline supply rose more than expected. The EIA reported a bounty of gasoline inventories, which increased by 3.8 million barrels last week. As far as demand goes, the EIA said that total products supplies over the last four-week period has averaged nearly 18.5 million barrels per day, down by 5.3 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 9.0 million barrels per day, down by 2.1% from the same period last year. Distillate fuel product supplied has averaged 3.8 million barrels per day over the last four weeks, down by 3.9 percent from the same period last year. Jet fuel product supplied is 0.9 percent lower over the last four weeks compared to the same four-week period last year.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


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