Given the increasingly low stock levels at a time of year when they should be building, both the US and Europe are facing the serious prospect of distillates shortages heading into the Northern Hemisphere winter, Bank of America Merrill Lynch has warned in a note.
"Distillate stocks in North America and in Europe are at very low levels," BofA Merrill Lynch said in its Global Energy Weekly report this week.
"Unless European and Asian refineries turn runs up sharply and unless the heavy draw on US supplies from Latin America eases up, inventories will likely not build to adequate levels for this winter."
Describing the current tightness in the US Atlantic Basin as "precarious," the bank said in the short term it saw the potential for lower distillates crack spreads as refiners had every incentive to increase supplies, but still worried it would "be too little too late" for ensuring adequate supplies in the winter.
"With such a low starting point for inventories, heating oil cracks might face upside in the fourth quarter," BofA Merrill Lynch said.
"In fact, if the stock build disappoints or if we see an active hurricane season, the situation for heating oil cracks could be explosive later this year."
The heating oil crack -- the relative value of the product to a barrel of crude -- is currently trading at a premium to front-month Brent of around $15/b, up from around $12/b at the start of June.
In Europe, meanwhile, the bank noted refined petroleum products in general had been "declining sharply this year" to their lowest levels since November 2007, with the gasoil market especially tight.
"Anecdotal evidence suggests that Germany, the UK, France and several countries in the Mediterranean are at risk of running out of diesel inventories," BofA Merrill Lynch said.
"Needless to say, such low inventories provide very little cushion for shocks and could keep the market in backwardation for longer, a market state that does not support storage economics."
As such, the bank also warned gasoil crack spreads -- currently around $16/b -- could face further upside in the winter.
