Weather to drive fuel prices

By Melissa Akin and Janet McGurty

LONDON/NEW YORK (Reuters) - The average consumer may think that fuel is expensive, but some in the oil refining industry will disagree.

Prices for refined products such as gasoline and heating oil did not fully keep up with oil's rally to $100, leaving refiners on the brink of losses with some fuels.

Now, as the rally in crude oil prices flags, exhausted by mounting evidence of an economic recession that could sap demand, heating fuels may be ready to pick up the baton as analysts suggest winter supplies are perilously slim.

And despite worries about recession, many believe that in the near term oil product demand will be strong out of consumer necessity to heat homes.

"Inventories are low. Production is under pressure. And even if the economy is headed for a you-know-what, it's still winter," said UBS economist Jan Stuart, who said he believed some of the strength shown by crude prices earlier this month may shift to heating oil.

U.S. inventories of heating oil in early January fell 37 percent from their year ago levels, while in Europe, stocks of middle distillate fuels, which include heating oil, were down 50 percent as of December.

At the same time, because the cost of the crude oil they refine has outstripped the price of the finished product, refiners have had no incentive to run at their usual rates as cracks, or product premiums to crude oil, have collapsed.

"Some Gulf Coast gasoline cracks have dropped as low as $1, increasing the possibility of run cuts," Macquarie senior vice president Nauman Barakat said on Friday.