Increasing global demand for distillate fuel has also changed the term structure of the Nymex heating oil futures curve, which has shifted incentives away from holding inventory and toward exporting. When the global call on U.S. distillate fuel was smaller than it is today, the term structure of the Nymex heating oil futures was heavily influenced by the heating-related winter increase in distillate demand in the U.S. Northeast. During the summer, when refineries ramp up runs to supply increased driving-related demand for gasoline, heating oil demand is lower. Without a strong demand pull from export markets, the additional production of distillate during the summer months had no immediate market and the futures curve would typically move into strong contango (when future prices are higher than prompt prices), encouraging inventory building to meet winter demand.
As global distillate demand has grown and exports of distillate from the United States have increased, and as U.S. consumption of heating oil has decreased, the seasonality of the U.S. distillate market has waned. Demand for distillate outside the United States has little seasonality. This decreased seasonality of the distillate market has flattened the Nymex heating oil futures curve. For 2012 and 2013, on trading days from June through August, the average spread between the first contract and the fourth contract was -2 cents per gallon and -1 cent per gallon, respectively. For the previous five years, that spread averaged -7 cents per gallon. The reduced spread indicates that it is more economical to sell refinery production promptly, either into the export market or for domestic consumption, rather than to hold it in inventory for future consumption. Accordingly, inventories of distillate fuel have been at or near the bottom of the five-year range since mid-2012 (Figure 2).
The extent to which U.S. distillate exports will continue to grow depends on several factors, perhaps the most important of which is the pace of global refinery capacity expansions. About two-thirds of U.S. distillate exports during the first nine months of 2013 were to Central and South America and Mexico. That share is similar to the same period in 2007, as these regions have been short of distillate fuel. If refinery capacity expands as planned over the next several years, either in Latin America or in other regions such as the Middle East, U.S. refiners could face increasing competition in distillate export markets. However, in the short term, the competitive advantages of Gulf Coast refiners should continue to support their current strong position within the global market.