A narrow price spread for the October-November heating oil contracts could discourage distillates players from storing the heating fuel for winter, at least on paper. But, after factoring in a cash discount of about 1.75cts/gal, the storage economics turn favorable, albeit less than year-ago economics.   

The NYMEX front-month heating oil contango spread is less than a penny per gallon, significantly weaker than 3cts/gal seen a year ago.   On Friday, the three-month spread from October to December is less than 3cts/gal.   
The contango is relatively weak for this time of the year, considering the colder temperatures and expected rising demand over the next few months.   
The front-month heating oil contract has been supported by a strong export flow to Europe and South America over the past few months. This helps to prevent a supply glut in the United States amid poor domestic demand.   
“With the cost of money and tanks, there is very little incentive to carry oil. Demand is sloppy here in the U.S., but it’s been fairly robust elsewhere in the world, including China India and Brazil,” a trader said.   “It’s the global picture that is the main factor, not the U.S. alone,” he added.     
One major buyer of heating oil in the U.S. is Petrobras. The Brazilian state-owned oil firm is buying more than 2 million bbl a month of diesel from the U.S. for August-October, capitalizing on favorable economics of weaker prices and freight rates.   The bulk of the U.S. purchase is from the U.S. Gulf Coast, and some from the New York Harbor.
In August, Petrobras bought about 2.8 million bbl of diesel from the U.S.   Also, the narrow front-month heating oil contango spread is supported by a high availability of clean products tanks in the New York Harbor.   “It [the front-month spread] won’t get too weak because there’re too many potential players to take delivery on a weak expiry,” a second trader said.   
“There are a lot more potential takers than givers….Exports are keeping the market balanced during the stock building season,” he added.   OPIS reported on Monday that storage tank rates in the New York Harbor have fallen significantly from a year ago due to a lack of arbitrage opportunities and poor demand.   
In the longer run, the forward price curve for NYMEX heating oil flipped to a relatively steep backwardation of about 10cts/gal from January to June 2012.   The strong winter heating oil prices may be overly bullish as the U.S. distillates production remains strong, thanks to robust distillates margins.   
“The reality will be moving to a flatter heating oil curve for January to June. We have plenty of production in the winter to supply ourselves and won’t draw like the spreads suggest,” the second trader said. Distillates inventory for the week ended Sept. 9 at 61.12 million bbl was substantially lower than a year ago, but stocks are still relatively higher than historical levels prior to 2009.