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Page added on June 29, 2007

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Distillate Inventory Balance Looks Scary as Summer Begins

About 175 days remain until the Winter solstice brings peak heating season to the U.S., but veteran S&D people are already worried about the prospects of supply. Specifically, they are concerned that refining dynamics, exports, storage considerations, and even hurricane threats could put some areas at especially high risk next Fall.

June is typically a month where overall distillate stocks tend to swell, led many times by high sulfur heating oil barrels. But thanks in part to new NRLM regulations that pretty much put all diesel requirements at 0.05% or less, heating oil is viewed as the least flexible product in the middle of the barrel. The result? Stock builds could be rare this summer, as refiners concentrate on making low sulfur or ultra low sulfur diesel.

Thus far, making the sweetest blends of diesel has paid off handsomely for refiners. N.Y. heating oil has fetched about $13 bbl over the price of WTI crude year to date, but 0.05% sulfur diesel and ULSD have commanded $18-$19 bbl. Gulf Coast refiners have fared even better, getting about $20 bbl over crude for ULSD and some $18 bbl for the legacy transportation fuel.

But those relationships could change drastically, if inventory trends
persist. Primary stocks of fuel that meets various on-road or off-road diesel specs stand at 91.6-million bbl, well above last year’s 74.7-million bbl or levels seen earlier this decade. High sulfur No. 2 oil stocks, however, are currently at just 31.1-million bbl, down by 18.7-million bbl from last year and off by 21.6-million bbl from 2002. Hence, those huge 12-20cts gal spreads between heating oil and diesel may narrow in the second half of 2007.

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