Distillate heating oil supplies remain low, report says

The Petroleum Industry Research Foundation reports that US home heating oil stocks remain low despite an increase in distillate production, setting the stage for a potential shortage if the winter is unusually cold. It said low heating oil inventories, tight natural gas supplies, and renewed threats to Middle East stability create reasons to worry about heating oil supplies this winter.

The Petroleum Industry Research Foundation Inc. (Pirinc), New York City, reports that US distillate stocks still remain a cause for concern, especially if unusually cold winter weather hits the US.

It noted that the Clinton administration's decision to release 30 million bbl of oil from the US Strategic Petroleum Reserve has added to the available world supply of crude and the potential distillate supply available to US consumers.

But it said low heating oil inventories, tight natural gas supplies, and renewed threats to Middle East stability create reasons to worry about heating oil supplies this winter�despite higher distillate production.

It said higher costs for heating homes this winter are all but inevitable, as crude oil and natural gas prices are $10/bbl and $2.50/Mcf higher than last year, respectively. Gasoline prices also are 24�/gal higher than this time last year and heating oil is 36�/gal higher.

Pirinc said low distillate inventories are cause for concern. US inventories of crude and crude products are 75 million bbl below this time last year. The rate of inventory rebuilding from February also has been slow, with no apparent overall recovery during the summer.

The foundation noted that distillate production has risen sharply, particularly the production of high-sulfur distillate. "Refinery runs for the past 6 weeks have been at record levels. Moreover, there is some evidence that secondary inventories are building. Barring an oil supply disruption, or cold weather, world oil market conditions are likely to stabilize, gradually improving prospects of meeting winter needs."

However, distillate supplies, particularly inventories of distillate with more than .05% of sulfur used for heating oil, remain low.

Distillate supplies are down 20% from this time in 1999 versus declines of 4% in gasoline and 5% for crude. Distillate stocks have declined more sharply than other products because refiners focused on gasoline earlier this year.

Pirinc said imports supply a modest volume of distillate, but do play a critical role in meeting winter peak demands.

Oil reserve
The US decision to create a heating oil reserve "couldn't have come at a worse time," the foundation said.

It said the action added to the already intense competition for supply, and placed further pressure on prices. The move also exacerbated the decline of futures prices for heating oil versus the currently strong commodity prices, which in turn created a disincentive to build commercial stocks.

"Concerns about under just what circumstances the reserve will be used could potentially interfere with increases in product imports, the US's critical winter supply safety valve," the foundation noted.

It also said requirements by New York state and New Jersey for minimum stocks came at a poor time. They require utilities to have 6-10 days of heating oil supplies in storage or have contracts allowing them access to that much supply. The requirements aggravated price pressures when utilities began buying supplies to meet deadlines of Oct. 1 in New York and Nov. 1 in New Jersey.

Pirinc said some industry groups have urged the US to ban distillate exports temporarily, but an embargo against nations such as Mexico, which exports large quantities of crude to the US, could result in retaliatory cuts.

Pirinc urged a temporary waiver of the Jones Act, which requires that shipments between US ports be made on US-flagged ships, since no more US-flagged ships are available to move oil from Gulf Coast refineries to the East Coast.

It said states and the Environmental Protection Agency could relax product specifications to improve potential supply.

"Government could also help by collecting and providing information on what is a 'black hole', namely the state of secondary and tertiary inventories," Pirinc said.

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