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Diesel Price May Drop Below Gasoline

“Refiners are producing a lot more of this stuff.”

TIM EVANS, CITI FUTURES PERSPECTIVE

Diesel prices in many parts of the world should drop below gasoline this summer for the first time since mid-2007 as refinery projects lift output and slumping economies slash transport and manufacturing demand.

The expected shift would restore the typical balance between the two fuels, market participants around the world said. Diesel, closely related to heating oil, traditionally has been more costly in the Northern Hemisphere in winter but cheaper in the summer when temperatures rise and U. S. gasoline use peaks.

“I’d say there’s a fairly good chance that we could see gasoline regain its price premium this summer for the first time since the summer of 2007,” said Peter Beutel, analyst at Cameron Hanover in New Canaan, Conn.

The premium of NYMEX heating oil, the U. S. diesel benchmark price, to gasoline has dropped from US43 cents per gallon to just over US10 cents per gallon in the past month. U. S. and European retail pumps have seen a similar move.

“It would not be unheard of to see distillate prices drop to a discount to gasoline, given the forces at work,” said Tim Evans, analyst at Citi Futures Perspective in New York.

Analysts said a key reason diesel’s relationship to gasoline may revert back to normal is that refiners have expanded their distillate capacity to cash in on a recent demand boom from the freight and electricity sectors.

It was this global demand increase that pulled diesel prices well above gasoline for the entirety of 2008.

“The distillate yields from refineries are up substantially because refiners have boosted their coking capacity,” said Evans. “Refiners are producing a lot more of this stuff.”

But the increased yields are coming on just as a worldwide economic slowdown triggers a dramatic decline in energy consumption that has hit diesel-intensive global freight more severely than commuting and discretionary road travel.

Refiners have also been cutting production in the U. S. and parts of Europe and Asia to combat sagging profit margins. Those cuts tend to have a more dramatic impact on gasoline than distillates due to the higher distillate yields.

“Generally, you get two times more diesel than gasoline in a typical refinery,” one trading source said.

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Retail container traffic at major U. S. and Canadian ports fell nearly eight per cent in 2008 and is forecast to fall another 11.8 per cent in the first half of 2009, industry watcher Port Tracker said.

The U. S. trucking industry reported a 20 per cent slide in tonnage over the past six months, the biggest drop on record.

The impact on U. S. distillate demand has been pronounced, with consumption this year at negative 3.7 per cent compared to gasoline’s negative 0.5 per cent, according to government data.

Increased output and softer demand have helped U. S. distillate inventories climb to about 10 per cent higher than a year ago, versus gasoline’s 4.4 per cent deficit, data showed.

“This isn’t a situation where the fundamental pressures are subtle. The fundamentals are out there in plain view for anybody to see,” said Evans.

In Europe, gasoline inventories at the end of January were down 12.5 per cent from a year ago while distillates stocks were 1.4 per cent higher, according to Euroilstock.

In many Asian countries, meanwhile, cuts in government-subsidized prices since the third quarter of last year have failed to spur diesel demand, while gasoline has been supported by reduced output and strong motorist consumption.

Dealers warned that gasoline strength in Asia may be muted this spring by the startup of gasoline exports from India’s giant 580,000-barrel-per-day Reliance refinery, however.

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