Diesel in Madison Market Gains 10.2cts from 1-1/2 Mo Low

    

   CRANBURY, N.J. (DTN) -- In the wholesale terminal market in Madison, 
Wisconsin, diesel fuel is on offer at an average asking price of $2.191 gallon, 
up 2.09cts on the day and 10.2cts or 4.9 percent higher than the Aug. 26 1-1/2 
month low of $2.089 gallon. The supplier offer price is down 9.8cts or 4.3 
percent from early August when it reached a three-month high of $2.289 gallon.

   Prices at Madison's wholesale diesel terminal market are affected by the 
Chicago spot market, which is benchmarked against New York Mercantile Exchange 
heating oil futures. 

   Rack postings, referring to the supplier sales price posted at the terminal, 
started the day at a 5.3cts premium to the regional Chicago market, 
strengthening from the previous week, while remaining below the 5.9cts premium 
averaged during the second quarter.

   Nearby delivery heating oil futures have climbed to a three-week high today, 
cracking through initial resistance at $2.0670 gallon, consistent with its 
short-term uptrend. However, the price upside has been limited by high 
inventory levels, with distillate supply at a 30 year high. Distillate fuels 
primarily include diesel fuel, along with higher sulfur heating oil.

   Seasonally, heating oil futures move higher from August to October ahead of 
the winter season, as the market bids prices up in anticipation of increased 
weather-related demand. However, with inventory at a huge surplus, this year's 
pre-season rally might not happen, despite the historical trend showing a 
better than 90 percent increase in prices from August to October during the 
last 30 years.

   In the United States, diesel demand correlates closely with the economic 
performance of the country. This was on display during the Great Recession, 
with diesel demand plunging, not showing signs of growth until late March, 
early April. Early second quarter data was impressive, showing a sharp increase 
in demand against the comparable period in 2009, but the growth pace slowed 
during the summer months, mirroring the slowdown observed for the U.S. economic 
recovery. 

   By late August however, diesel demand's growth rate accelerated, with 
implied demand for the four weeks ending Aug. 27 up 7.8 percent compared 
against the comparable period in 2009. During the preceding four-week period, 
the year-on-year growth rate was 4.9 percent.

   The increased demand triggered the first drawdown in distillate fuel 
inventories since late May, although the 800,000 bbl decline was modest. 
Midwest demand for diesel is picking up now early in the harvest season, which 
could support higher diesel prices over the next several weeks. This occurred 
during the spring planting season, when wholesale prices soared to 18-month 
highs. There were also brief supply outages at some terminals, as lifting 
demand at the rack outpaced pipeline deliveries. 

   Data released midweek by the Institute of Supply Management supports the 
increased demand growth pace for diesel seen in August. ISM's manufacturing 
index increased by 0.8 to 56.3 compared with market expectations for a decline 
to 53.2, with any figure above 50 indicating expansion. The report was released 
the same day as data from China showed an increase in manufacturing for the 
Aisan economic powerhouse. These two reports reversed a steady stream of 
disappointing data on broad-based economic indicators, diminishing talk of an 
approaching double-dip back into recession. Nonetheless, there remains great 
concern over the viability of the recovery highlighted by high unemployment.

   Data released this morning by the Department of Labor showed the private 
sector added 67,000 jobs to the U.S. economy in August, but job losses 
increased last month as temporary workers hired for the Census completed their 
work. The national unemployment rate increased to 9.6 percent in August, while 
involuntary part-time workers, those that couldn't find full-time work or had 
their hours cut surged to 8.9 million. That's on top of 1.1 million discouraged 
workers, with unemployed persons as counted by the Labor Department at 14.9 
million.

   The oil and equity markets initially rallied on this report, with the market 
expecting more workers, 110,000, to have been laid off last month. NYMEX oil 
futures subsequently turned lower, while major equity indices pared gains.

   "The Great Depression playbook isn't working. Near-zero short-term interest 
rates, record-low borrowing costs as reflected in the bond market, a giant 
stimulus package and tax credits for small businesses that hire the long-term 
unemployed have all failed to do enough," Mike Fitzpatrick, vice president of 
energy with MF Global, said in a note to investors.

   This sentiment of anemic federal policy is important because it drives 
market expectations; and the oil market has followed macroeconomic indicators 
far more closely than its own supply-demand fundamentals. In short, a flagging 
equities market would pressure oil and diesel prices while a rallying market 
would lift those values, with oil traders using the stock market as a forward 
gauge of demand. This odd relationship has confounded forward price outlooks 
for the oil market.

   Despite the uncertainty, the price performance by heating oil futures for 
the past several months suggests would be buyers should acquire diesel fuel 
when the nearby delivery contract, currently October, breaks below $2.00 
gallon. Those in need of supply should consider acquiring product with a crack 
above $2.10 gallon, which would suggest higher gains. 

   Brian L. Milne, 1.609.371.3328, brian.milne@telventdtn.com, 
www.telventdtn.com. (c) 2010 Telvent DTN. All rights reserved.

   DISCLAIMER: The market analysis offered above is not a recommendation to buy 
or sell, nor is the author certified to make such recommendations.