RBOB-Heat: Watch the Heating Oil spreads

Almost a 3c drop on Jul RBOB-Heat yesterday to bring the widowmaker back to the recent lows. Counter-seasonal to the US demand trends with this moving happening just before the peak Summer driving season and the customary malaise in Summer heating oil demand. Yesterday’s move was mostly driven by the distillate cracks and spreads jumping higher. Gasoline seemed at times to be a mere spectator yesterday unable to match the distillate strength. Aug-Dec Heating oil structure went from 1.5c/gal in contango to mild backwardation this week. This is particularly interesting because Aug-Dec is the traditional US stock-building period and also because it appears that the market finally responded to the 9-year low in distillate inventories as represented in the below graph. In an environment where so many bearish indicators regards to slower US internal trucking demand and biofuel substitution, Q4 distillates might just shape up to be a dark horse to watch.

US distillate inventories: