With the onset of heating season, one thing is certain: there is plenty of supply ‘ so much that it is expected to have a continuing effect on how demand and price interact during the coming cold months, according to experts and observers at market information services and at the Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy.
‘We’re hovering around 25-year highs in inventory right now,” Brian Milne, renewable fuels editor for Telvent DTN, said in September. Telvent DTN provides news and market information on refined fuels, commodities and futures trading. ‘We’re heading into the winter season with a huge surplus in distillate fuel oil including diesel and heating oil.”
The much reduced economic activity of ‘the Great Recession” as it has been labeled by many, saw demand plunge and remain slack, resulting in the current abundance of supply.
‘In 2008 we had lower global oil demand than we did in 2007 and this year the [EIA] projections are that we’re going to have lower global oil demand against last year,” Milne said. ‘The last time that happened was in the early 1980s. It’s a very bearish phenomenon and it was the direct result of the recession, not just in the U.S., but globally. Demand was cut dramatically.”
A survey by Platts, the division of The McGraw-Hill Companies that provides information on global energy markets, shows there is going to be more crude being produced, said Robert Sharp, renewable fuels editor. Further, the Organization of Petroleum Exporting Countries (OPEC) is weighing an increase in production, Sharp said. Meanwhile, he said, ‘Demand still isn’t picking up.”
These factors resulted in heating oil prices this fall that are the lowest in some time. The American Institute for Economic Research, using data from the U.S. Department of Energy, reported that, factoring for inflation, heating oil prices in September were at their lowest point in four years. The Independent Connecticut Petroleum Association (ICPA), a trade group that represents independent oil dealers in the state, reported that heating oil prices in September were down 50 percent from a year earlier and hailed the shift as a boon to consumers.
The following is a more detailed look at what is being said about the current supply situation, including a discussion of the effect demand could have on the surplus over the coming season, and what the implications might be for heating oil prices.
Just how big is the current supply of heating oil? The nation’s stock of distillate greater than 500 ppm sulfur was at 49.3 million barrels on Sept. 11; one year before, the inventory was a considerably lower 35.7 million barrels, according to EIA statistics. That’s a difference of 13.6 million barrels.
The bulk of that total U.S. inventory of heating oil is in the East Coast: 40.3 million barrels. Contrast that with the East Coast inventory a year ago, when it was 26.9 million barrels, according to the EIA’s figures.
The bigger picture is that distillate inventory levels, which include No. 2 oil, generally are exceptionally high not only in the U.S., but in Europe and Asia, ‘and there are some quantities we don’t know about because they’re being held in tankers off-shore,” said Milne of Telvent DTN. The move to store product in vessels began early this year, according to Milne, when the market ‘flipped into contango” (distant delivery prices for futures exceeded spot prices).
‘Ships, if they weren’t moving around, were being converted into floating storage vessels” by companies and large brokers, Milne said. The heating oil market on the New York Mercantile Exchange was in contango at the beginning of this year, Milne said, though since then it has been easing ‘so we’re not seeing that type of an action” ‘ movement to floating storage ‘ ‘now, but still the result is we have a huge overhang of supply.”
Lately, there have been reports and declarations that the Great Recession is over, or at least subsiding, and that there are signs, however modest, of economic rejuvenation. Whether this will translate into an uptick in futures prices and/or demand remains to be seen.
Milne noted that the government’s economic stimulus package, and upward movement of the stock market had nurtured ‘sentiment that the recovery in the economy was coming.”
Along with expectations of an improving economy, Milne observed, ‘the anticipation is that demand for crude oil and its products will be higher. The caveat here is with heating oil. Because there’s such a large overhang, it’s going to limit how far heating oil [prices] will increase.”
According to the latest Short-Term Energy Outlook published by the EIA, a ‘modest economic recovery projected for 2010″ is expected to contribute to a 260,000