The past few heating seasons have not necessarily been exciting for heating oil dealers and marketers’at least not in a good way. Fuel prices have not been pleasing nor has the weather particularly cooperated. However, the early indications are that 2013 may turn out to be a luckier year for the industry than most. Fuel Oil News interviewed some experts for their perspective on what to expect in the coming months. On the oil front, we were assisted by Alan Levine and Brian Milne.
Levine is the CEO and chairman of Powerhouse, a group of seasoned energy experts and broker professionals working in partnership to meet the business goals of its customers. He is an internationally recognized expert in pricing and business practices in the energy industry. A petroleum specialist for over 40 years, Alan is a highly regarded authority on the relationship of energy futures to cash petroleum markets.
Milne the editor of Schneider Electric’s MarketWire’a real-time market and news service focused on U.S. oil product markets and relevant news and analysis, and also the editor of OilSpot’a weekly newsletter on the oil markets.
As should be noted, none of the projections outlined here are set in stone and individual purchasing and hedging decision should use this as simply a starting point and not the ending point in the decision-making process.
The core component in the price of refined fuels centers on crude oil. The various domestic shale fields have been generating more than just natural gas with new supplies of crude oil coming online as well. Despite this, oil prices have not yet seen a significant drop for a range of reasons. Instability in the Middle East has played into this, but so far not to an extraordinary extent.
‘We saw an initial boost in earlier in July with the Egyptian crisis and then the Syrian situation worked to push the contract to a 28-month-high settlement,” said Milne. ‘But some of that is getting peeled back. Interestingly enough we just haven’t collapsed yet and we should still see crude move lower, but we’re finding some support because crude oil in the middle part of the country is making it to market. That has pushed up the WTI price and narrowed the discount it has been trading at with Brent. WTI moved into a big discount with Brent because of an inability to get a lot of this new crude oil we are finding to market. But they are breaking the logjam.”
Milne noted that even though the United States is producing record amounts of crude the Cushing, Okla., supply hub has dropped for the past two months and it continues to decline to a 1.5 year low showing that the supply is making it to market, which helps keep the U.S. price closer to world prices.
Where heating oil is concerned, our experts foresee a fair amount of price stability around the $3 mark. Both Milne and Levine noted that inventories are low relative to the five-year range. Although distillate production is up much of that product is being consumed in other countries, particularly Latin America. ‘Our export numbers are really breathtaking and were exporting about 1.2 million barrels per day which two to three years ago would have been unheard of,” said Milne. There are a lot of reasons for that, not the least of which is that Europe is in the process of reducing its refinery capabilities.” This factor, along with increased domestic demand, acts as support for distillate prices.
The transition away from high sulfur heating fuels to ultralow sulfur heating fuels is also seeing more of an impact. As Milne noted, this year the futures contract transitioned from a heating oil contract to ultralow sulfur diesel contract with a May delivery and with that transition there was a slight bump up in value because ULSD has a higher specification. Levine noted that dealers and marketers will have to get used to this new landscape as it’s going to be the norm moving forward.
‘Particularly in New England, there has been some change in the laws as to the sulfur content, and this is a period of tremendous flux even though some states are not yet at the point where ultralow sulfur content is required,” Levine said. ‘What they are finding is that the pricing is tending to be based on the price of ultralow sulfur because of uncertainty as to what grade of distillate fuel oil is going to be available as the year wears on. Most of these guys have been selling high sulfur’500 ppm or more’and now they are in a different world and we have data here that demonstrates that refiners have markedly reduced their output of high sulfur fuel and are essentially focusing much more on producing ultralow sulfur which is less than 15 ppm. So that’s a serious problem and there is no clear answer as to how precisely that will turn out this year. As we move forward, it seems more and more likely that refiners will try to get out of the business of producing high sulfur fuel.”
So what price range seems to be the sweet spot this season?
‘If you look at pricing itself we had a big run in February because of Libya and we hit a high of $3.25 so far for 2013 and we rallied up in late August relative to Syria with a $3.22 high,” Milne said. ‘We’ve pulled back and are holding support around the $3.05 area now. It’s a tricky one because we don’t understand this Syria thing and how it’s going to pan out. I would doubt it will get below the $2.90 area unless there’s a major selloff or a major change of the Federal Reserve. So we’re probably looking at a $2.90 bottom, but I think it will be closer to trending in the $3 area or a little bit above that. If we get some real cold weather and strong demand, we could certainly challenge that high at $3.25 from earlier in the year, but it’s going to take a lot to really push it to that level.”
These estimates are right in line with what Levine sees for the season. ‘Right now (prices) are about $3.10, and we find support around $3 and I would say to any dealer that if you could be a buyer at $3, you might consider jumping on that,” he said. ‘By and large we are bullish on fuel oil and we think the likelihood is that we will not go much lower, but whether we’ll go over $3.25, which is a season-high, that’s a question as well. So I think were going to kind of get stuck in this range, and if history is any indication, prices might start to fall in November and December, but right now we would be buyers in the market in anticipation that we are not going to get much relief in terms of stock.
Propane supply is ramping up as with the other fuels due to the shale fields coming online. However, as is also the case with the other fuels, exports are propping up prices.
‘August is usually a real quiet time for propane and prices would typically melt away, but we’ve seen some support there from exports and not just out of Mont Belvieu (Texas) hub,” Milne said. ‘Higher Mont Belvieu prices have drawn supply away from the Conway (Kan.) hub down to the Gulf because of the export demand so that it’s supporting the propane prices, even though they are down overall historically because of all the oil and natural gas refining.”
Also impacting prices is this year’s late and abundant harvest season where propane is used to dry grain.
‘Propane is becoming much more desirable product and you are seeing conversions from heating oil into propane, but it’s also used very importantly in drying grains ‘ specifically corn,” Levine said. ‘We have clients in the Midwest tell us that the corn crop is very large and relatively late and the demand for propane for drying has been very strong. So right now we’re seeing a little bit of a setback in the market, but overall we would anticipate prices for propane to move up as well. We did get somewhere near $1.20’it’s trending back now’but overall we are looking at somewhere around $1.30 or $1.40.”
Relatively low natural gas prices have certainly challenged the industry, but both our experts agree that the era of super-low natural gas prices has passed. While there is newly accessible abundant supply, natural gas still have to compete with abundant coal (current assaults on the fuel by the EPA aside) as well as growing exports and increases in natural gas demand domestically as an alternative motor fuel.
As Levine noted, ‘Gas may have an upside constrained by the amount of fuel, but at the same time you can’t really move materially below $3 because of fuel competition (with coal).”
‘A year and half ago we got down to about $1.90 in, and we’re not going to see it go below two dollars again,” Milne said. ‘We did get over $4 dollars in May then it trended down. I wouldn’t be surprised to see natural gas get over $4 dollars this winter, but not much more than that. You’re probably looking at about $3.25 to $4.25 market.”
‘The market for gas has moved down over the past several months, trading right now at $3.53, and what’s happened is, starting around April, prices topped out somewhere around $4.60 or so and have moved down ever since with very little upward momentum,” Levine said. ‘But at the same time open interest’the number of futures contracts available’has not risen as prices have fallen so there is no evidence here that people are really lining up to get short in the market. We think that the likelihood of anything much under $3 dollars is very slim.”
Biodiesel or as employed in the industry, Bioheat is typically used at a 5 percent to 20 percent mixture so the overall price impact is somewhat subdued from the start. However, for the companies that have embraced biofuel the current blender’s credit and favorable RIN values have also been supporting the product favorably from a low pricing standpoint. A variety of biofuel incentives throughout the Northeast and mid-Atlantic also provide price efficiencies. The big question moving forward revolves around the continued existence of the blender credit and what happens with RIN values and to a lesser extent commodity prices relative to the feedstocks.
Weather or not