Heating Oil Heats Up!
Wednesday, November 16, 2011
The term structure of Heating Oil futures has moved to a backwardation through September of 2012, which is likely a sign that the market is willing to pay a premium to obtain supplies in the near-term. Some traders looking for Heating Oil supplies to remain tight may wish to explore buying bull spreads in Heating Oil futures. A bull spread involves buying near-term Heating Oil futures and at the same time selling more deferred trading months. For example, January 2012 Heating Oil can be bought and April Heating Oil sold at approximately a 0.0650 premium to the January futures. Buyers of the bull spread would wish to see the January premium widen vs. the April futures.
Fundamentals
Traders of the energy products have been seeing a mixed market recently, as Gasoline prices continue to fall, as lackluster demand has kept rallies in check. It is another story entirely for Heating Oil, as tight supplies and increasing demand are keeping this market near 6-month highs. Refinery maintenance and closing have greatly affected distillate supplies, as remaining production has favored Gasoline as opposed to the middle distillates. The lower production and increasing demand, especially in the Midwest as the grain harvest progresses, have sent US supplies to 3-year lows. Last week the EIA surprised many traders by reporting that US distillate supplies fell by just over 6 million barrels last week. Normally, distillate supplies in the northeast start to climb, as refineries begin building inventories of Heating Oil going into the winter months. However, this year inventories in the northeast are 11% below the 5-year average, as low refining margins have caused the shut-down of refineries on the East Coast. US International demand has also increased, especially in China, which may be seeing continued tight supplies of Diesel fuel into 2012. Good demand from overseas has sparked an export boom for distillates, with the US exporting an average of 895,000 barrels per day in August. Many traders are looking for another large draw in distillate inventories when the EIA releases its weekly energy stocks report, with the average analyst's estimate calling for a draw of 2.8 million barrels last week -- which if true, would be the 7th consecutive week of inventory draws.
Technical Notes
Looking at the daily chart for January Heating Oil, we notice a mixed technical picture. First, the 20-day moving average is attempting to cross over the 200-day moving average, which is a bullish signal. However, bears will counter that the rally is beginning to lose steam, as trading volume has been light during the past three sessions, as the market made new highs. This could be a sign that recent buying was nothing more than short-covering and that fresh buying has not materialized at current prices. The 14-day RSI has leveled out, but still remains at a strong 65.50 level. Support for January Heating Oil is seen at the 200-day moving average, which is currently just above the 3.0700 level. Resistance is seen at the recent high of 3.1956.
Mike Zarembski, Senior Commodity Analyst
