Diesel price may drop below gasoline

NEW YORK (Reuters) - Diesel prices in many parts of the world should drop below gasoline this summer for the first time since mid-2007 as refinery projects lift output and slumping economies slash transport and manufacturing demand.

The expected shift would restore the typical balance between the two fuels, market participants around the world said. Diesel, closely related to heating oil, traditionally has been more costly in the Northern Hemisphere winter but cheaper in the summer when temperatures rise and U.S. gasoline use peaks.

"I'd say there's a fairly good chance that we could see gasoline regain its price premium this summer for the first time since the summer of 2007," said Peter Beutel, analyst at Cameron Hanover in New Canaan, Connecticut.

The premium of NYMEX heating oil, the U.S. diesel benchmark price, to gasoline has dropped from 43 cents per gallon to just over 10 cents per gallon in the past month. U.S. and European retail pumps have seen a similar move.

"It would not be unheard of to see distillate prices drop to a discount to gasoline given the forces at work," said Tim Evans, analyst at Citi Futures Perspective in New York.

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Analysts said a key reason diesel's relationship to gasoline may revert back to normal is that refiners have expanded their distillate capacity to cash in on a recent demand boom from the freight and electricity sectors.

It was this global demand increase that pulled diesel prices well above gasoline for the entirety of 2008.

"The distillate yields from refineries are up substantially because refiners have boosted their coking capacity," said Evans. "Refiners are producing a lot more of this stuff."

The increased yields, however, are coming on just as a worldwide economic slowdown triggers a dramatic decline in energy consumption that has hit diesel-intensive global freight more severely than commuting and discretionary road travel.

"From the pricing point of view, gasoline demand's not as impacted by economic factors versus diesel," said Victor Shum, an analyst with Purvin & Gertz in Singapore.

Refiners have also been cutting production in the United States, and parts of Europe and Asia to combat sagging profit margins. Those cuts tend to have a more dramatic impact on gasoline than distillates due to the higher distillate yields.

"Generally, you get two times more diesel than gasoline in a typical refinery," one trading source said.

ROBUST DIESEL STOCKS

Retail container traffic at major U.S. and Canadian ports fell nearly 8 percent in 2008 and is forecast to fall another 11.8 percent in the first half of 2009, industry watcher Port Tracker said last week.

The U.S. trucking industry reported a 20 percent slide in tonnage over the past six months, the biggest drop on record.

The impact on U.S. distillate demand has been pronounced, with consumption this year at negative 3.7 percent compared to gasoline's negative 0.5 percent, according to government data.

Increased output and softer demand have helped U.S. distillate inventories climb to about 10 percent higher than a year ago, versus gasoline's 4.4 percent deficit, data showed.

"This isn't a situation where the fundamental pressures are subtle. The fundamentals are out there in plain view for anybody to see," said Evans.

In Europe, gasoline inventories at the end of January were down 12.5 percent from a year ago while distillates stocks were 1.4 percent higher, according to Euroilstock.

In many Asian countries, meanwhile, cuts in government-subsidized prices since the third quarter of last year have failed to spur diesel demand, while gasoline has been supported by reduced output and strong motorist consumption.

"Importers are rushing on a gasoline hunt," said a trader in Hanoi. "Despite the hot gasoline fever, diesel consumption is stagnant. It's just weak.

Dealers warned that gasoline strength in Asia may be muted this spring by the start up of gasoline exports from India's giant 580,000 barrel per day Reliance refinery, however.

(Reporting by Felicia Loo and Seng Li Peng in Singapore, Ikuko Kao in London, and Richard Valdmanis in New York; Editing by David Gregorio)