Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
[Nico Grant, Bloomberg]
Home-heating bills in the U.S. have been slow to rise this fall as unusually mild weather has kept fuel demand in check. But when the cold eventually arrives consumers may encounter some sticker shock.
Domestic stockpiles of heating oil — used in more than 6 million homes mostly in the Northeast — are the lowest in two years after hurricanes disrupted refineries along the Gulf of Mexico and surging demand for distillate fuels in Europe sparked record U.S. exports. The government says the cost of heating oil will jump 17 percent this winter from a year earlier, and may be almost one-third higher if the weather is colder than forecast.
“Refiners seem to be behind the curve in producing distillate,” Phil Flynn, senior market analyst at Price Futures Group Inc. in Chicago, said by telephone.
While about two-thirds of U.S. diesel demand comes from big commercial trucks, more than one in five homes in the Northeast are heated with the fuel, which can influence prices for many petroleum products during the winter.
Investors are betting that the country is heading for a supply crunch when cold weather arrives. Their net-long position — the difference between bets that diesel prices will increase and wagers on a drop — has lingered near a record high since September, based on futures and options traded on the New York Mercantile Exchange and tracked by the U.S. Commodity Futures Trading Commission.
U.S. distillate stockpiles have plunged 12 percent in the past year to 128.9 million barrels, the lowest since May of 2015, according to the government’s Energy Information Administration. While part of that decline reflects the impact of hurricane damage to Texas and Louisiana refineries in August and September, supplies also are being exported at a record pace to places like Europe, where diesel engines are more common and fuel supplies have been dropping.
“We’re seeing increased diesel demand worldwide,” Jack Lipinski, chief executive officer of CVR Energy Inc., said Wednesday during the company’s third-quarter earnings call.
Shipments in the week ended Oct. 27 reached 1.69 million barrels a day, an all-time high, EIA data show. Exports are now 50 percent higher than a year earlier and well above the five-year average of 1.14 million a day. That could leave even tighter supplies in the U.S. as economic growth and winter weather revive domestic demand.
“We think distillate demand is going to go up,” Gary Ross, the executive chairman and head of global oil at S&P Global Platts, said in a news conference last month. “There’s no doubt that distillate will lead the oil complex this winter.”
To be sure, fewer Americans are relying on heating oil as the country switches to natural gas. In the Northeast, about 21 percent of households use heating oil, down from 25 percent five years ago, government data show. Still, supplies have gotten so tight that the normal seasonal increase in demand could jolt the entire oil market.
While last winter was unseasonably warm in the Northeast, temperatures this season will be closer to the 30-year average, said Paul Pastelok, lead U.S. forecaster at AccuWeather Inc. in State College, Pennsylvania.
“People out there are going to feel cold,” Pastelok said.
Dropping temperatures in the U.S. probably won’t prevent more distillate exports to Europe, where demand is growing to heat homes and fuel cars, Kyle Cooper, director of research at IAF Advisors in Houston, said by telephone. European ARA diesel stockpiles are at the smallest since June 2014.
While diesel futures are up 26 percent since the end of June, prices could go even higher, said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida.
“People are screaming out that they have very low supply of distillate in the U.S. and Europe right now,” Finlon said by telephone.A Subsidiary of Price Holdings, Inc. – a Diversified Financial Services Firm. Member NIBA, NFA Past results are not necessarily indicative of future results. Investing in futures can involve substantial risk of loss & is not suitable for everyone. Trading foreign exchange also involves a high degree of risk. The leverage created by trading on margin can work against you as well as for you, and losses can exceed your entire investment. Before opening an account and trading, you should seek advice from your advisors as appropriate to ensure that you understand the risks and can withstand the losses. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or futures. The Price Futures Group, its officers, directors, employees, and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Reproduction and/or distribution of any portion of this report are strictly prohibited without the written permission of the author. Trading in futures contracts, options on futures contracts, and forward contracts is not suitable for all investors and involves substantial risks. ©2018