US Distillate inventory levels on the US Atlantic coast are below their five-year range, and the home heating oil season has started in the key PADD 1A region of New England. Heating oil is used extensively in this region due to the decentralized housing infrastructure that makes heating oil delivery the most economical choice for most consumers.

There has been a flurry of ULSD spot market fixtures reported over the past several days, and although it is unclear how many are actually fixed vs on subjects(ie uncertain) it does appear that a reverse arbitrage trade is now working. Normally distillate is shipped out of the US to Latin America & Europe, but during a reverse arbitrage the trade flow reverses.

Chart-2-05DEC17

The US Atlantic coast can’t be supplied economically from the US Gulf to points north of about Jacksonville due to cabotage restrictions that require the use of a US Flagged tanker. These ships command a premium of about 3X a foreign flag ship at today’s rates. The Colonial Pipeline, an alternative delivery source of clean product, terminates in Linden, New Jersey.

Chart-1-05DEC17

The import of distillate into the US is important as the unexpected addition of these cargoes into the market creates a short-term scarcity of ships. These imports have correlated with higher MR rates on the benchmark TC2 Europe to US Atlantic coast benchmark.
If New England see’s a cold snap, the demand for heating oil could increase. This isn’t good if you’re looking to heat a house in Vermont, but it’s great news if you have an MR position in Europe over the next two months.

Chart-3-05DEC17

Source: Hellenic Shipping News.