Online Extra: Heating Season Fuels Outlook (Part II)

Below is “Part II” of the “Heating Season Fuels Outlook: 2016-2017,” in which two executives with Sprague Energy, Managing Director David P. Daoust and Natural Gas Supply Manager Shaun Kennedy, responded via email to questions from Fuel Oil News.

FON: How do you see this coming season compared to last heating season?

Daoust and Kennedy: It would be difficult to imagine a warmer heating season than we had last year. Predictions of El Nino resulting in above-average temperatures certainly came to pass as degree days came in about 75% of normal. This year holds no such predictions, so we should expect a return to more normal weather. That said, the supplies of finished products in PADD 1 [the East Coast] are running 15% higher than they were last year at this time and 40% higher than they were in 2014. As a result, even with normal winter temperatures, supplies of heating oil should be adequate for the coming season.

The 2015/2016 winter was the warmest on record, which had a negative impact on overall natural gas demand. As a result prices were depressed, reflective of the loose supply/demand balance.  Low demand also allowed the end-of-season inventories to reach an all-time high level. Winter temperatures are difficult to predict, but it is likely that the 2016/2017 season will be colder than last winter, leading to more demand and a tighter balance. However, given the current inventory levels and corresponding prices, and barring any substantial transportation issues, this season should be relatively similar to last. Despite far fewer wells in production, the per-well output is strong and there is a large inventory of drilled but uncompleted wells should the need arise. Natural gas prices are likely to remain range-bound for the foreseeable future as any demand increase will easily be accommodated by existing supply.

FON: Regarding crude oil, what is the status of the fight between OPEC and the U.S. for market share? What do you think the price per barrel will be this heating season? Where might it range?

Daoust and Kennedy: OPEC has made it clear that they intended to protect their world market share. For years, high crude prices stimulated increasing U.S. E&P, which ultimately resulted in the crude and product over-supply we find ourselves in today. At prices above about $60/bbl., U.S. producers can profitably bring crude to market. OPEC countries can do so for much less and have leveraged that strength by forcing crude oil prices lower in an attempt to quell U.S. production and regain market share. We would expect crude oil prices to continue to range between $35-$55/bbl, as in recent months. Much above $55 will bring back increased U.S. production and much below $35 will harm OPEC economies. Barring unusual world events, we are likely to remain range-bound through the season.

FON: How do you see distillates, especially heating oil, and to a somewhat lesser extent on-highway diesel, playing out this coming winter?

Daoust and Kennedy: As recently as the late 1980s there was a single fuel used to heat homes and power diesel trucks down the road. Since then we have lived in a world of multiple distillate fuels as environmental concerns over air quality forced sulfur out of products. That time is now coming to a close as all distillate fuels will be required to contain no more than 15 ppm sulfur as of July 1, 2018. As of then—after nearly three decades, we will once again return to a single fuel world.  But until then—for two more heating seasons—it will remain business as usual and as mentioned above, stocks of finished distillate products are at high levels and should be sufficient to meet both on and off-road demand.

FON: Is the effort to export natural gas gaining traction?

Daoust and Kennedy: Currently, there is a single LNG export facility operating in the US, in Louisiana. A second is scheduled to come online in November of 2017.  Additionally, pipeline exports to Mexico are increasing. The U.S. is rich in natural gas supply and exports will absolutely play a critical role in the future to balance the market. We do not believe it will be a factor this winter as there is not yet enough export capacity. We think that in future years natural gas exports will have an evident impact on US natural gas prices.

Sprague Disclaimer: These responses are provided for informational purposes only and are not intended as advice on any transaction nor is it a solicitation to buy or sell commodities. Sprague makes no representations or warranties with respect to the contents of such information, including, without limitation, its accuracy and completeness, and Sprague shall not be responsible for the consequence of reliance upon any opinions, statements, projections and analyses presented herein or for any omission or error in fact.