* Positions liquidated after Sandy smashes U.S. demand
* Stocks build in Europe as refinery maintenance ends
* Correction seen as overdue, contango eyed
By Claire Milhench and Julia Payne
LONDON, Nov 2 (Reuters) - Superstorm Sandy has ended months
of heavy speculation in gasoil futures on the back of a tight
middle distillates market, with traders now expecting stocks to
build as European refineries return from maintenance and Sandy
crushes U.S. demand.
Middle distillates inventories, which include heating oil,
diesel and jet, had been running at multi-year lows in both the
United States and Europe - threatening to ramp up heating bills
for households in the event of an early cold snap.
"A lot of the market length was on a speculative basis
because distillate stocks were low in Europe and the U.S," said
Mark Thomas, head of European energy at Marex Spectron.
The front month ICE gasoil futures contract pushed up to
trade at a wide premium to the second month, getting up to $25 a
tonne in early October.
But the spread between the ICE gasoil November and
December contracts has collapsed this week to around $2.50 a
tonne, down from over $18 a tonne on Monday.
The premium, or backwardation, began widening out in
September after a series of unplanned outages due to fires and
explosions at refineries in the United States and Venezuela just
as European refiners were going into seasonal maintenance.
In Europe, this created shortages of diesel and jet, which
are also priced off the ICE gasoil futures contract, while
globally it encouraged investors and traders to hold large long
positions in the front month contract.
The wide backwardation has proved stubbornly persistent, but
in just three sessions the November/December spread gave back
76.4 percent of the rally from mid-June to Oct. 29, said Harry
Tchilinguirian, head of commodity market strategy at BNP
Paribas.
"However, the move in the timespread still looks overdone to
us, even in view of the Nov. 2012 contract coming up to expiry
soon," he said.
DEMAND DESTRUCTION
Traders linked the collapse to a liquidation of positions
following Superstorm Sandy and stock builds in northwest Europe
as refineries return from maintenance.
"It's a consequence of demand destruction and therefore
greater Atlantic basin bearishness since Sandy," said one.
"U.S. is very long diesel with zero demand on the East
Coast," said another. Disruption to infrastructure continues to
prevent frustrated U.S. motorists from filling up at the pumps
as terminals are unable to supply petrol stations.
On Thursday the Energy Information Administration said that
U.S. distillate stockpiles, which include heating oil and
diesel, had fallen by less than expected week-on-week. They
slipped 93,000 barrels, compared with forecasts for a 1.3
million barrel draw.
Other traders linked the sudden collapse to stock builds at
the Amsterdam-Rotterdam-Antwerp hub. Gasoil inventories
independently stored at ARA leapt 8 percent on the week to 2.032
million tonnes, according to data from Dutch oil consultant
Pieter Kulsen.
"Some traders thought there would be a squeeze in November
on high sulphur gasoil but there is plenty of supply in ARA,"
said Christopher Bellew, a broker at Jefferies Bache.
Several traders said this was because seasonal refinery
maintenance is coming to an end.
"A lot of refineries were in turnaround in Russia, Europe
and Skikda (in Algeria) so the fact that a large number have
come back has altered the supply situation," said Thomas at
Marex Spectron.
Another trader said the market might also be anticipating
lower water levels along the Rhine. This can make it difficult
for barges to travel fully loaded into Germany and Switzerland
so heating oil stocks begin to build in the ARA hub.
BNP Paribas's Tchilinguirian added that the relatively light
damage to U.S. East Coast refining meant that expectations of a
strong demand pull from the U.S. on European supplies had
disappeared. "Equally, in Europe, we do not have cold weather
conditions to support additional gasoil demand."
The correction is seen as long overdue but some were still
caught out by the rapidity of the collapse. Some traders now
think selling pressure on the front month contract could push it
down so much that it starts to trade at a discount to the second
month contract - a situation described as contango.
"It happened fast and I didn't see it coming," said one
distillates trader in northwest Europe. "But then again, I have
been saying for some time that we need to go into a contango
when you look at the global market, but that is still not
happening."
(Additional reporting by Jessica Donati, editing by William
Hardy)
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