U.S. WINTER FUEL DEMAND TO MAINTAIN UPWARD TREND

Demand for fuel oil will rise this winter in the U.S. for the fourth straight year.

Strong economic growth and low fuel oil prices will help boost consumption. Winter weather close to normal will be only slightly warmer than last winter and will rein the expected increase in demand.

Natural gas consumption also will be up again this year,

Demand for natural gas also will get a spark from increased economic activity and prices markedly lower than a year ago. Increased consumption in the industrial and electric utility sectors will set the pace.

Consumption in the residential and commercial sectors will remain at levels close to last winter, with the surge from increased economic activity offset by warmer weather. Electric utility demand will advance significantly a's lower prices stimulate the choice of natural gas as a power generating fuel.

Only a small increase in power production will come from nuclear or hydroelectric plants.

The pace of U.S. economic growth has quickened significantly from 1993, a year of rather modest recovery. Gross domestic product is predicted to be up 3% this year, growing at close to that pace in 1995.

Stocks, particularly for distillate fuel oil, appear to be adequate to meet demand this winter.

Entering the heating season, stocks of distillate and crude oil were up from a year ago. However, residual fuel oil stocks were at a level more consistent with the end of the heating season and are not expected to contribute significantly to winter supply. Refiners will rely more heavily on imports to help meet resid demand.

The only area of potential concern is refining capacity.

U.S. capacity has been declining as throughput has been rising. Capacity utilization has moved close to the maximum sustainable level. There is little available excess capacity to meet a possible surge in demand due to colder than expected weather or to make up for refinery accidents or other problems.

Refiners appear to be more concerned with handling supplies of reformulated gasoline (RFG) than with winter fuel supplies.

World crude oil supply is substantial, and there should be no problem in obtaining feedstock. So refiners should be able to meet their winter crude oil requirements without a concern for significant increases in crude costs.

FORECAST HIGHLIGHTS

Here are some of the highlights of Oil & Gas journal's outlook for U.S. winter fuel supply/demand.

U.S. winter demand for distillate and residual fuel oil will average 4.625 million b/d, up 56,000 b/d or 1.2% from last winter. Total demand, including exports, will average 5.025 million b/d, up 45,000 b/d or 0.9% from a year earlier.

Total exports will average 400,000 b/d this winter, down 11,000 b/d from last winter. Distillate exports, which increased sharply last year, will slip 9,000 b/d to 295,000 b/d. Resid exports, which plummeted last year, will dip marginally-by about 2,000 b/d-to 105,000 b/d. Tight refining capacity and increased domestic demand are expected to hold exports close to the level of last winter.

Total fuel oil imports will rise 2.1% to 695,000 b/d. Imports of residual fuel oil will increase 2.4% to 465,000 b/d. Resid stocks were low entering the heating season, so additional demand will have to be met by imports. Distillate imports will be close to the level of a year ago-up 1.3% at 230,000 b/d. Distillate imports have not varied a great deal during the last several years.

U.S. refinery production of fuel oils will remain at the same volume as a year ago, averaging 4.11 million b/d. Distillate stocks were built up significantly prior to the heating season, lowering the requirement for winter refinery output.

Fuel oil supplied from stocks will be up this winter, mainly because of higher distillate stocks entering the heating season. Total stocks are adequate to meet winter demand.

Stocks will provide 230,000 b/d of fuel oil this winter, compared with 189, 000 b/d last winter and 205, 000 b/d the winter before.

Distillate stocks at the end of September were an estimated 145 million bbl, compared with 131 million bbl a year earlier. Resid stocks were only 42 million bbl this year, compared with 44 million bbl last year. Crude oil stocks were 336 million bbl at the end of September this year vs. 321 million bbl a year earlier.

Natural gas consumption will rise 1.8% to 12.49 tcf this winter. Demand last winter increased 4.1% to 12.266 tcf.

DISTILLATE

Domestic demand for distillate will rise 1.6% this winter to an averge 3.405 million b/d. This will be fourth winter in a row for increased distillate consumption.

Distillate demand moved up 2.8% to average 3.12 million b/d in the 1991-92 winter, increased 3.1% to 3.217 million b/d for the 1992-93 winter, and increased 4.3% to 3.355 million b/d last winter.

Economic growth and colder winters are the main reasons for the increases.

Distillate demand peaked in the 1976-77 winter at 4.111 millon b/d, then fell for 6 straight years, declining 33% to a recent low of 2.739 million b/d. The slide was mainly due to fuel switching and conservation brought on by rapid increases in prices.

The average price of No. 2 heating oil to residences jumped from 41-8/gal in 1976 to $1.194/gal in 1981. The price then dropped steadily during 1981-87, falling to 80.3/gal in 1987.

Lower prices and steady economic growth helped boost distillate demand to 3.353 million b/d in the 198889 winter.

An economic recession and warmer than normal weather led to a slump in winter middle distillate demand, which dipped to 3.034 million b/d in 1990-91. Somewhat sluggish but steady economic growth, coupled with a return of closer to normal winter temperatures, boosted demand the last three winters. Demand moved up 2.8% in the winter of 1991-92, another 3.1% in 1992-93, and 4.3% last year to average 3.355 million b/d.

Distillate prices advanced, along with higher crude oil costs and increased demand, reaching $1.063/gal in 1990. The 1990 prices also were due in part to a spike in crude oil prices during the Persian Gulf war.

Prices have slipped since then and averaged only 91.1/gal last year.

Weak crude oil prices have led to even lower distillate prices this year. Latest figures reported by the Energy Information Administration (EIA) show the average residential price for No. 2 distillate was 82.2/gal in July, compared with 85.6/gal in July 1993.

The relatively low prices will dampen cost related conservation on the part of consumers and help bolster winter demand.

EIA has forecast average residential heating oil prices of 91.8/gal this winter, up slightly from 89.6/gal last winter. It expects a peak of 95/gal January 1995. However, current indications are that prices will not change markedly from a year ago.

Economic recovery has boosted transportation demand for diesel fuel, a trend expected to continue this winter. On-highway transport accounts for about 45% of distillate consumption. Demand for residential and commercial heating fuel is not expected to advance as significantly. In the heating sector, distillate is in direct competition with natural gas, which is capturing a majority of construction. Increased supply of natural gas, particularly in the Northeast, is also leading to some heating unit conversions and lower demand for distillate. Residential and commercial sectors account for about 20% of distillate consumption.

Demand in other sectors such as rail and marine transport also will get a boost by economic growth.

The Clean Air Act amendments of 1990 required that all on-highway diesel fuel contain only 0.05 wt % sulfur as of Oct. 1, 1993. However, new fuel specifications did not significantly boost the price of diesel fuel because the lower cost of feedstocks helped moderate prices.

EIA expected a 10% rise in diesel fuel prices last winter due to a combination of the new fuel specifications, increased federal tay and higher crude prices. The cost of the new fuel specifications was estimated at 3-4/gal, made up of 1 in variable costs and 2-30 to recover investment costs.

However, refiners' price of No. 2 diesel fuel for resale fell 8% last winter to average only 54.4/gal. Lower crude oil prices were the most significant reason.

The latest average price available from EIA is 53.7/gal in July, compared with 53.1/gal last July.

Most of the increased winter distillate demand will be supplied from higher stock levels starting the heating season this year.

Refinery production of distillate will rise only 0.1% to average 3.26 million b/d this winter, compared with 3.256 million b/d last winter. This will be the highest winter output since 1977-78.

Imports are expected to advance slightly, increasing 1.3% to 230,000 b/d.

Imports have played a smaller role in winter distillate supply in recent years. Imports averaged 201, 000 b/d in the 1990-91 winter, 233,000 b/d in 1991-92, 229,000 b/d in 1992-93 and 227,000 b/d last winter. Imports were 365,000 b/d in the 1988-89 winter.

The supply contribution from prewinter stocks is expected to rise significantly, increasing 19.3% to 210,000 b/d. Stocks contributed 176,000 b/d of distillate supply last year and 168,000 b/d the year before.

U.S. refiners entered the current heating season with distillate stocks at 145 million bbl, up substantially from 131 million b/d at the start of last winter.

Present stocks represent about 42.6 days of expected winter demand. Last year, end-September stocks were 39.1 days of winter demand. The volume during the last six winters has ranged from 36.9 days of supply to 44.9 days when demand was unpredictably low.

During the last four winters refiners have drawn down distillate stocks to 97-100 million bbl by the end of the heating season.

EIA has pegged the minimum operating level for U.S. distillate stocks 92.1 million bbl. Below that level there is a danger of supply disruptions.

Refiners apparently have placed a contingency buffer on that figure and not drawn distillate stocks below 97 million b/d the last five winters.

With increased demand and reduced refining capacity, it is doubtful refiners will risk supply problems by testing the minimum level.

RESIDUAL FUEL OIL

U.S. resid demand this winter is forecast to advance 0.5% to 1.22 million b/d. This follows an increase of 8.8% last winter to 1.214 million b/d.

Demand has slipped considerably during the past 15 years, but it has fluctuated in recent years, depending on the price of resid and competing fuels.

Resid consumption was 1.58 million b/d in the 1988-89 winter. It slipped to 1.445 million b/d the following winter, then dropped sharply in winter 1990-91 to 1. 143 million b/d. Intense competition from other fuels, particularly natural gas, reduced resid demand.

Demand increased to 1.207 million b/d the winter of 1991-92, then slumped to 1.116 million b/d the winter of 1992-93 as prices increased and natural gas made greater inroads into resid markets.

Demand rebounded to 1.22 million b/d last winter as prices slipped and became more competitive with gas.

Resid demand is particularly sensitive to price movements because many utilities and industrial plants can switch to less costly fuels when prices rise.

Resid prices have remained relatively stable since the end of the Persian Gulf war. The average refiner sales price to end users slipped from 44.4/gal in 1990 to an average 340 in 1991, 33.8(t in 1992, and 33.7 in 1993.

The relatively steady price contrasts to the sharp increase in natural gas prices. That has improved the competitive position of resid. This year, natural gas prices have slipped and resid prices are expected to be slightly higher than last winter. But the higher level of economic activity and electric power generation are expected to help resid demand hold at a level slightly higher than last winter.

Imports provide a substantial portion of resid supply. Imports are predicted to average 465,000 b/d this winter, up 2.4% from last winter. Imports moved up smartly last winter 15.8% gas demand increased. Imports fell to 392,000 b/d the winter of 199293 as demand slipped, then rose to 449,000 b/d the winter of 1991-92.

During the past few winters, imports have tended to rise and fall with surges in demand while refinery production has been sliding.

The modest increase in resid demand this winter is not expected to boost refinery production of the fuel, which is forecast to slip 0.5% to 850,000 b/d. The expected increase in imports and slide in exports will help supply the increase in consumption.

Increased domestic demand and tighter refinery utilization has led to a decline in exports. Lower prices have also provided less incentive for exporting resid.

Resid stocks are not expected to contribute very much, if anything, to supply this year. Only 10,000 b/d will come from stocks.

Entering the heating season, U.S. resid stocks were only 42 million bbl, compared with 44 million bbl the year before.

Refiners this winter may rely solely on imports and plant production to supply the market and leave stocks close to the current level.

EIA has placed minimum operating stocks for resid at 39 million bbl. With stocks close to the minimum level, refiners won't be able to use them extensively to meet surges in demand.

REFINERY CAPACITY, UTILIZATION

U.S. spare refining capacity has declined in recent years. The squeeze between declining total capacity and rising inputs has left little excess capacity at certain times of the year to meet demand surges due to changes in weather or the rate of economic growth.

Lack of excess capacity could pose a problem if major accidents or mechanical failures rob the system of capacity.

In addition, refiners in recent years have relied less on stock buildup to meet seasonal demand swings. They have instead relied mainly on increased runs, viewing excess stocks as major costs and running operations to minimize inventories.

Although refiners do not rely as much on huge stocks to supply the market, as in the past, they still increase inventories of distillate and heavy fuel oil in anticipation of higher seasonal demand.

EIA data show U.S. refining capacity has been slowly falling from an average 15.7 million b/d in 1991 to 15.17 million b/d in August 1994, the latest month for which figures are available.

Crude runs to stills averaged 13.3 million b/d in 1991, rising 14.5 million b/d last August. Meantime, utilization rate climbed from an average 86% to 96.5%.

The American Petroleum Institute's monthly refining survey showed U.S. capacity at 15.175 million b/d last September, up slightly from 15.142 million b/d a year earlier.

API also showed input to crude distillation units in September up 1.9% at 14.3 million b/d and the utilization rate at 94.3%, compared with 92.8% last year. This places excess capacity at only 870,000 b/d, leaving little room to deal with contingencies.

Utilization rates tend to be high in August and September, key months to build stocks for the heating season.

NATURAL GAS

U.S. demand for natural gas is expected to continue to rise, increasing 1.8% to 12.49 tcf this winter. Consumption increased 4.1% last winter and 4.2% the previous year. Gas is expected to run into competition from heavy fuel oil and coal this winter.

Industrial demand is expected to be up 2.117, at 4.28 tcf. Demand was up 4.1% last year.

Demand for power generating will advance 9.5% to 1.23 tcf this winter after moving up 2.3% last winter.

Natural gas demand in the residential sector is expected to be at the same level as last winter, 3.85 tcf. Housing construction and conversions from fuel oil will boost demand. This will be offset by winter weather closer to normal. Last year, residential demand rose 4.1% as colder weather and increased economic activity boosted consumption.

Demand in the commercial sector is expected to be up slightly-only 0.1% to 2.12 tcf. This follows a 5.7% increase last year.

Natural gas consumption for plant and pipeline fuel is projected to advance 2.7% this year to 1.01 tcf. This follows a 2.4% increase last year.

OIL AND GAS PRICES

Average prices of world export crude oil were relatively steady during the months when refiners were laying in feedstock: July, August, and September. Prices weakened a bit in September.

Prices started the year at an average $13.48/bbl. They gained strength during April-August period, rising to an average $16.97/bbl in July and $16.67/bbl in August.

The average price slipped to $15.60/bbl in September, then firmed to $15.98/bbl in October. The average for the week of last Oct. 28 was $16.24/bbl, compared with $14.97/bbl a year earlier. The latest price is up 23% from the start of the year.

Fuel oil prices also have been relatively steady but have shown some recent strength.

EIA data for the week of Oct. 28 show the spot price of No. 2 heating oil, the New York reseller barge price, at $22.07/bbl. This is up from $21.13/bbl at the start of the year but below $23.26/bbl a year earlier.

The residual fuel oil spot price was $15.25/bbl, up from $13.75/bbl the week of Jan. 1 this year and $14.00/bbl a year earlier.

While fuel oil prices are near the level of last year, natural gas prices are somewhat lower.

Greater demand for gas has not hiked prices this year. In fact, increased supply has led to lower prices most of the year.

During the week of Oct. 28 the price of natural gas on the New York Mercantile Exchange was $1.93/MMBTU, down 17.7% from a year ago. For the first 10 months of this year, Nymex prices have averaged $1.986/MMBTU, down only 4.7% from the average in the same period of 1993.

Last year, prices started weak and strengthened later in the year as demand increased. This year, prices started strong but weakened later in the year as supplies increased.

The latest natural gas prices are down significantly-17.7%-from a year ago. By contrast, spot resid prices are up 8.9% from a year ago, but spot distillate prices are down 5.1%. This shifts some of the competitive advantage back toward natural gas, but not significantly.