Euro heating oil slumps as exports sag,stocks grow
09:31 a.m. Aug 03, 1998 Eastern
By Duncan Shiels
LONDON, Aug 3 (Reuters) - European heating oil prices hit a 10-year low
on Monday as brimming stocks and weak Asian demand for Europe's excess
supply took their toll.
August futures prices for gas oil on London's International Petroleum
Exchange (IPE) touched $110 a tonne, the lowest price since October
1988.
The new slide beats a recent low in March when IPE Brent crude also
touched rock bottom but now gas oil is relatively much weaker than
crude.
''You've got so much gas oil around that until the gas oil disappears
the prices are not going to rise fundamentally,'' said one trader.
The slump in heating oil prices is bad news for oil producers who, by
cutting output this year, were hoping to push prices higher as the
market prepares for northern hemisphere winter.
Analysts said the recession which has lain Asia low since last autumn
has been a major factor in the southerly dive in European gas oil
prices.
''A year or two ago you saw a lot of gas oil heading out of the
Mediterranean, the Black Sea and Ventspils right to the Far East in
enormous quantities 80,000 tonnes at a time but you don't see that
anymore,'' said Konrad Gerber of Petro-Logistics in Switzerland.
''You've got lack of demand in the East and it's being offloaded into
Europe, which has got too much.''
Stocks started rising early this year when the El Nino weather
phenomenon produced a mild winter.
European Union middle distillate (heating oil and diesel) stocks at the
end of June stood at 318 million barrels, 10 percent up on the year.
European refiners said on Friday they were actively considering cuts in
crude runs to combat sinking profit margins.
But cuts are late in coming after a period in which refiners have pumped
out products for storage, taking advantage of low crude prices and hefty
discounts for prompt gas oil, known in the market as contango.
''High contangoes and cheap crude have combined to produce a race among
refiners to produce as much as possible before margins rise,'' said
David Fyfe of Energy Market Consultants.
Current month-to-month IPE margins range between $3.50 to $4.75 a tonne
up to January 1999 enough to pay for storage costs.
But Gerber says only refinery run cuts in Russia can reduce the glut and
there is little sign of that happening.
''The gas oil (output) is surprisingly high from Russia,'' he said.
''Normally at this time of year one tends to see a dip because August is
the harvest time and they need a lot of gas oil for the agricultural and
transport sectors, but we haven't seen it yet.''
Early figures suggest the June level of Russian heating oil exports of
450,000 barrels a day was maintained in July.
All this points to further price falls before winter demand picks up
with traders praying that last year's mild weather will not be repeated.
''There's no doubt that to completely clear the surplus from the levels
that are around at the moment in Europe it would take a very substantial
cold snap,'' said Fyfe.
''If one accepts that crude could be rebounding modestly in the second
half of this year, we don't expect prices to move contra-seasonally.
''But we would expect price ratios to slip well into the bottom half of
the normal range versus crude unless we get a very substantial pick-up
in demand in the fourth quarter.''
Meteorologists are already predicting a La Nina weather pattern this
year bringing colder than normal weather.
In the short-term, traders see the next support level for gas oil at
$107.75.
''We don't think it will drop below that in the near future but if it
does we think it'll fall quite a lot further,'' said a Scandinavian
dealer.
A trader in Germany, where end-June consumer heating oil stocks were
already at almost 62 percent, was more sanguine.
''We once saw $85 (per tonne) in the early eighties,'' she said. ''Why
shouldn't it happen again?.''
((London newsroom, 44 171 542 8185, fax 44 171 542 4453,
london.energy.desk+reuters.com))
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