Diesel gains as cold boosts heating and power generation demand

NEW YORK – Diesel futures rose for a third day as frigid weather across the U.S. Northeast boosted demand for heating fuel oil-fired power generation with supplies in the New York Harbor area at the lowest level in almost six years.

Prices climbed as colder temperatures will grip most of the eastern United States and Canada through the start of February. The region is expected to have readings about 8 degrees Fahrenheit (4 Celsius) below normal through Feb. 2, said Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Md. ISO New England said oil-fired plants accounted for one-quarter of the region’s power today.

“Utilities are really starting to buy a lot of distillate because of regional natural gas shortages,” Tom Finlon, director of Energy Analytics Group Ltd., said by phone from Jupiter, Fla. “They’re turning to distillate generation, and that’s blowing out prices.”

Ultra-low sulfur diesel fuel for February delivery advanced 5.61 cents, or 1.8 percent, to $3.1326 a gallon at 12:56 p.m. on the New York Mercantile Exchange. Trading volume was 44 percent above the 100-day average.

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“We have a lot of winter left,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “When you have weather events, markets can stay in an irrational mode longer than you would expect to be normal because you’ve got emotions trading also.”

Supplies around New York Harbor, the delivery point for futures contracts, slid 6.5 percent to 17 million barrels last week, the least since May 9, 2008, according to Energy Information Administration data. Nationwide, stockpiles slipped 3.21 million barrels to 120.7 million barrels.

Higher premium

The February contract’s premium to March futures widened 2.4 cents to 10.95 cents a gallon, the highest for this day since 2000, indicating concern that available supplies are limited. February diesel and gasoline contracts will expire at the end of trading on Jan. 31.

Cold weather has already hindered refinery operations, including at PBF Energy Inc.’s 185,000-barrel-a-day Paulsboro, N.J., site this week, and continued cold may disrupt other refineries, driving prices higher. Refinery utilization last week fell 3.5 percentage points to a 13-week low of 86.5 percent.

“If the arctic temperatures reach the Gulf Coast and stay cold, you’d expect there will be significant refinery outages that would make the heating oil shortage that much worse,” Finlon said.

Crack spreads

Diesel’s crack spread versus West Texas Intermediate crude, a rough measure of refining profitability, increased $1.77 to $30.07 a barrel. The premium over European benchmark Brent gained $1 to $19.04.

Gasoline inventories rose 2.12 million barrels to 235.3 million last week, the highest level since February 2011. The increase came as East Coast imports of gasoline jumped 30 percent to 500,000 barrels a day.

Supplies could increase more if winter weather keeps drivers off the road. Schools were closed as far south as the Houston area as temperatures in the fourth-largest U.S. city fell to 29 today when an ice storm moved through the area, according to the National Weather Service. Winter storm and hard-freeze warnings stretched from Texas to Georgia.

Diesel-gasoline

Diesel’s premium to gasoline increased to 46.46 cents over gasoline, the largest since November 2011.

“The spread is very reflective of the fundamentals right now,” Chirichella said. “If it stays cold, we can see the spread go further out. When schools are canceled and businesses are telling employees to stay off work, that will exacerbate the build in gasoline.”

February-delivery gasoline rose 0.62 cent to $2.668 a gallon on volume that was 14 percent below the 100-day average.

The motor fuel’s crack spread versus WTI grew 68 cents to $15.49 a barrel. Its premium to London-traded Brent crude slipped 2 cents to $4.53.

The average U.S. pump price rose 0.1 cent to $3.288 a gallon, the third consecutive increase, according to data from Heathrow, Fla.-based AAA.

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