The US Heating Oil Watch – Analysis

(EIA) — East Coast distillate inventories have been on the decline since the end of August, a time when they normally build ahead of winter. Distillate stocks in the Northeast, the Nation’s largest heating oil market, typically peak in November, to help meet peak heating demand during the months of December, January, and February.

Weekly data show the total East Coast distillate inventories peaking on August 26 and dropping 4.7 million barrels by October 28, an average draw of 75,000 barrels per day (bbl/d) (Figure 1).

Last year during this same period, in contrast, distillate stocks were higher, and changed very little. This year’s counter-seasonal decline is mostly coming from the Central Atlantic, a region serviced by several product pipelines from the U.S. Gulf Coast. This region includes New York Harbor, the delivery point of the New York Mercantile Exchange (NYMEX) heating oil and reformulated gasoline blendstock for oxygenate blending (RBOB) futures contracts, that also serves as a distribution point for much distillate moving to New England.

The recent decline in East Coast distillate inventories leaves stocks in the region 11 percent below their five-year average. What volume changes account for such an unusual departure from seasonal patterns? In theory, a counter-seasonal stock draw could reflect higher demand, lower supply, increased exports or some combination of those factors.

The demand factor is easy to rule out. Through August, East Coast distillate product supplied (a proxy for demand) has been about the same this year compared with last. Furthermore, there have been no signs that demand since August would have been unusually high.

Supply does not seem to be the issue either. Refinery capacity in the Northeast is about the same over this time as was available last year. The 185,000 bbl/d Trainer refinery was shut down this fall, but the 182,200 bbl/d Delaware City facility, which had been shutdown last year, was subsequently restarted. Average production of distillate on the East Coast from August 26 through October 28 actually exceeded last year’s level over the same period by 36,000 bbl/d. Distillate imports, however, were lower by an average of 17,000 bbl/d, countering about half of the production increase.

That leaves exports as potentially explaining most of the volume difference, but distillate exports are not collected on a weekly basis. Monthly data, however, show the United States exported a record 895,000 bbl/d of distillate fuel in August, the most recent month for which data is available (Figure 2). Regionally, distillate exports from the East Coast have increased 59 percent (33,000 bbl/d) January through August in 2011 over 2010; exports from the Gulf Coast, the main U.S. exporting region, have increased 21 percent (104,000 bbl/d). Europe and Latin America are major destinations for U.S. distillate exports. In September and October 2011, the price difference for distillate between New York Harbor and Europe did seem to invite some movement to Europe.

While East Coast distillate inventories are lower than last year, Gulf Coast inventories are still quite high, so that, in aggregate, U.S. inventories are more comfortable than East Coast data alone would suggest. Distillate movements from the Gulf Coast to the East Coast, like product exports, are not available from the weekly data. But price differences between New York Harbor and the Gulf Coast continue to support moving product. Moving distillate volumes from the Gulf Coast to the East Coast may not happen quickly, however, as the Colonial Pipeline is currently running at capacity. Thus, incremental distillate volumes to the Northeast could only be accommodated on the pipeline at the expense of other products and/or destinations, rather than simply by adding more total product into the Colonial Pipeline. Waterborne shipments from the Gulf Coast to the East Coast are not unprecedented but are more cumbersome than pipeline shipments and come at a higher cost. But if much more product is to come from the Gulf Coast, it will likely be by water.

While inventories are dropping, distillate crack spreads are not unusually large. Currently, New York Harbor distillate crack spreads are close to their seasonal average, having rebounded somewhat from their relatively weak levels seen in the second and third quarters. While distillate cracks are unremarkable, the term structure of the heating oil futures curve is indicating a tighter prompt market than usual for this time of year. The current backwardation in the heating oil future curve between the front-month contract price and the third-month contract is very unusual for fall. The curve implies prices are higher now than they are expected to be in three months, during the height of winter, when demand for heating oil typically peaks and reinforces the lack of incentive to store product at the moment.

Nonetheless, as we head into the winter season, inventories are still adequate by historical measures, especially if structural changes in baseline demand are taken into account. The residential heating oil market has been shrinking, which means less inventory is needed to cover demand from this sector, though precise scope of that decline is unclear. Despite the closure of the Trainer refinery, the Delaware City refinery, which was not operating last winter, is currently running, keeping available capacity about the same. Furthermore, should market conditions warrant, some volumes being produced for export markets can be redirected to meet domestic needs. Meanwhile, some price signals continue to support moving product to the Northeast. EIA will continue to monitor both stock levels and trends in the distillate supply situation throughout the heating season.

Gasoline prices drop a penny while diesel prices jump

The U.S. average retail price of regular gasoline fell for the seventh time in eight weeks, shedding a penny to reach $3.45 per gallon. The average price is $0.65 per gallon higher than last year at this time. Leading the move down, the Gulf Coast tallied a four cent drop from last week’s average. The Rocky Mountain price fell almost three cents on the week, while the East Coast price was more than two cents lower. The average on the West Coast was down less than two cents this week. Moving in the other direction, the average gasoline price in the Midwest increased more than two cents. At $3.78 per gallon, the average gasoline price is highest on the West Coast and is lowest on the Gulf Coast at $3.26 per gallon.

The national average diesel price jumped almost seven cents to $3.89 per gallon, $0.83 per gallon higher than a year ago. The U.S. diesel fuel price rose 17.1 cents per gallon in the last three weeks as distillate fuel inventories decreased by 15.8 million barrels since the week ending September 23, adding to the upward pressure on diesel prices. Averages were up across all the regions, with the biggest increase in the Midwest, where diesel prices added more than eight cents to last week’s average. Gulf Coast and West Coast diesel prices both increased about six cents on the week, while the Rocky Mountains and East Coast both had gains of about a nickel.

Residential heating oil and propane prices increase

Residential heating oil prices increased during the period ending October 31, 2011. The average residential heating oil price rose $0.05 per gallon last week to reach $3.85 per gallon, an increase of $0.86 per gallon from the same time last year. The wholesale heating oil price increased by $0.05 per gallon last week to $3.16 per gallon; $0.84 per gallon more than last year at this time.

The average residential propane price increased two and a half cents to $2.82 per gallon. This is a rise of $0.36 per gallon compared to the $2.45 per gallon average from the same period last year. The wholesale propane price increased by more than $0.01 per gallon, rising from $1.49 per gallon to a price just shy of $1.51 per gallon, as the only regional price gain occurred in the Midwest. This was an increase of $0.22 per gallon when compared to the November 1, 2010 price of $1.29 per gallon.

Propane inventories post large build
Total U.S. inventories of propane moved higher following a large build last week, adding 1.2 million barrels to end at 60.3 million barrels, but still remaining below the average range. The East Coast and Gulf Coast regional stocks grew by 0.5 million barrels each. Meanwhile the Midwest region added 0.2 million barrels of propane. The Rocky Mountain/West Coast inventories were up slightly. Propylene non-fuel use inventories represented 6.1 percent of total propane inventories.