WASHINGTON, D.C. --- For U.S. petroleum product markets, the end of summer means a shift in focus from gasoline to heating oil and diesel fuel. With most of August behind us, and with gasoline inventories in the upper half of the average range, market participants feel reasonably sure that gasoline supplies are ample, absent any major disruption over the next several days, the department's Energy Information Administration (EIA) said. As a result, the NYMEX near-month futures price for reformulated gasoline has dropped nearly 34 cents per gallon between Aug. 1 and Aug. 22. However, as the market has shifted its focus towards heating oil and other distillate fuels like diesel fuel, there has not been anything close to the same type of price decline in distillate fuels. The near-month futures price for heating oil is relatively unchanged from Aug. 1 to Aug. 22, down about 4 cents per gallon during this period, and up over 14 cents per gallon from the summer low set on June 19. Why have the two products diverged in their respective price paths, and what does this mean for the near-term future? Part of the reason that distillate fuel products (diesel fuel and heating oil) have not seen the same pattern in spot or futures prices is the move towards ultra-low-sulfur diesel, the EIA explained in its most recent weekly report. With the transition from diesel fuel with a sulfur content of up to 500 parts per million (ppm) to diesel fuel with a sulfur content of up to only 15 ppm taking place between June 1 and Oct. 15, some temporary regional dislocations have already occurred. These dislocations can occur for many reasons, including anything from difficulty in making ultra-low-sulfur diesel fuel at a particular refinery, to issues with storage terminals as they may draw down inventory levels of regular diesel fuel to make room for ultra-low-sulfur diesel fuel, to potential problems with the distribution of ultra-low-sulfur diesel fuel through pipeline systems. Even if no major problems surface, the chance that they may occur is high enough to cause market participants to pay a little bit more than they would otherwise, to hedge against the possibility of paying significantly more should a problem occur, thus placing more upward pressure on prices. Also, the shift in focus from gasoline to distillate fuel in the late summer and early fall, followed by a shift back to gasoline in the late winter and early spring, has been a phenomenon growing in importance over the last few years, the EIA said. With limited spare capacity throughout the supply chain, markets don't have the luxury of looking too far ahead and instead concentrate on the upcoming cycle. As a result, concerns about the future tend to be magnified for those products the market currently has in its sights. Oil markets continue to face many uncertainties, the EIA said. While year-to-date hurricane activity has been minimal, hurricane season is far from over. The situation between the United Nations and Iran concerning Iran's nuclear program continues to dominate oil market headlines, and concerns about a potential oil supply disruption related to Iran continue to affect crude oil prices. Apprehension about crude oil disruptions elsewhere in the world linger as well, the EIA pointed out. Thus, while gasoline prices may continue to drop after Labor Day (absent any major disruption), diesel fuel and heating oil prices may remain elevated, as the market turns its focus from gasoline towards distillate fuel.

Originally posted on Fleet Financials