SPGSHO: With Winter Approaching, The Complex Heats Up


Investment thesis

In our last release on the S&P GSCI Heating Oil Index Spot (SPGSHO), our bullish view on the complex emerged slightly and the Index gained 2.72% to $237.33 per share, following a tightening of distillate fundamentals.

Going forward, the distillate storage picture is still favorable for the complex, given that U.S. storage is in a deep deficit compared to the 5-year average. Besides and although the sentiment on heating oil futures is still slightly bearish, speculators lifted robustly their bets on the complex, comforting our constructive view. Additionally and even if the market seems to be oversupplied, distillate cracks are robust, providing renewed tailwinds on the SPGSHO Index.

With the import-export balance deterioration and the distillate storage fastening its deficit the heating oil complex remains sustained

During the week ending October 11, distillate reserves in the U.S. withdrew for the fourth consecutive week, down 3% (w/w) to 123.5m barrels, the EIA shows. In the meantime, heating oil prices advanced moderately, up 3.28% (w/w) to $82.33 per barrel. This moderate storage decline contributed to push distillates into a deeper deficit and stock seasonality establishes now 11.3% or 15,768k barrels below the five-year average and 6.9% or 9,137k barrels under last year level.

Source: EIA

On the other side and crude oil refiners entered the bulk of the maintenance season, the heating oil blend is likely to remain under pressure, given low refining utilization rates, establishing at 83.1% versus a five-year average of 86.3%.

Source: EIA

Furthermore, the distillate import-export balance deteriorated moderately during the period, following dipping exports, down 26.74% (w/w) to 1,065k barrels per day that were marginally offset by climbing imports, reaching 197k barrels per day.

Source: EIA, Oleum Research

That being said, the elements above should continue to sustain heating oil prices and its proxy SPGSHO.

Speculator bets

According to the Commitment of Traders Report, published by the CFTC and covering the October 8 – 15 period, net speculative positioning on Nymex heating oil future contracts rose significantly, up 40.9% (w/w) to a net short length of 9,516 contracts.

Source: CFTC

While this strong increase has been mostly due to robust long accumulations, up 40.9% (w/w) to 48,880 contracts, short accretions marginally offset that, up 0.43% (w/w) to 58,396 contracts.

In spite of that, the sentiment on the heating oil complex remains bearish for the time being and away from the small net long positioning seen in August 2019, speculative bets have been pushing heating oil futures south all year long.

Since the beginning 2019, net spec length on Nymex heating oil futures dipped 22.5% or 1,748 contracts, whereas SPGSHO’s YTD performance lifted slightly, up 2.74% to $234.37.

Strong crack spread counterbalance the weak distillate supply-demand balance, sustaining the SPGSHO Index

In front of that, the distillate supply-demand balance, posted a fourth consecutive weekly deficit, indicating that the heating oil market is still oversupplied, although demand for the blend picked up significantly.

Indeed and while distillate supply declined moderately over the week ending October 11, down 3.04% (w/w) to 4,658k barrels, demand accelerated vigorously, up 8.18% (w/w) to 4,366k barrels. Nevertheless, demand remains weak for the time being and is unable to cope with excess supply, providing moderate headwinds on the heating oil complex and its proxy SPGSHO.

Source: EIA, Oleum Research

On the other hand, 3:2:1 cracks advanced robustly over the corresponding period, up 6.26% (w/w) to $19.83 per barrels and distillate spreads remain in a comfortable zone, climbing slightly less, up 5.57% (w/w) to $23.23 per barrel. That being said and in spite of this solid advance, crude cracks seem to be topping, indicating that a pullback might be nearing.

Source: Quandl, Oleum Research

Still, heating oil and Brent futures edged higher since the beginning of October and the steepening of the backwardation slope on heating oil futures brings a favorable roll yield for SPGSHO shares.

Going forward, we believe that the elements above will continue to sustain our constructive view on the complex and that the strong storage deficit combined with weak price seasonality observed in heating oil futures in the month of November will contribute to lifting the SPGSHO Index


Given the elements above, we maintain our constructive view on the heating oil complex and its proxy SPGSHO. Indeed, we believe that the weakening of the storage picture in the last three weeks, the steep advance of net speculative bets on heating oil futures seen last week and the persisting robust crack spreads will continue to sustain the heating blend.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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