SEVERAL FACTORS PREDICTED TO BOOST U.S. FUEL CONSUMPTION THIS WINTER

Robert J. Beck
Economics Editor

U.S. demand for fuels this winter will move up substantially from the depressed level of the last heating season.

The major reason will be a return to colder, closer to normal weather. Fuel demand also will get a boost from increased economic activity and prices lower than they were at this time last year.

As a result, demand for distillate fuel, residual fuel, and natural gas will rise.

During the last heating season, a number of factors combined to produce a sharp drop in demand for middle distillates and residual fuel oil:

• The winter was about 8% warmer than normal, reducing demand for heating oil.

• Due to the growing crisis in the Middle East, fuel oil prices were higher than they had been in years. That provided incentive for increased conservation on the part of residential and commercial consumers.

• The U.S. economy slumped into a recession during fourth quarter 1990 that continued through first half 1991.

The situation is reversed this year.

Preliminary estimates indicate that the economy started to move out of the recession in the third quarter of this year. There is guarded optimism that the recovery will continue.

Crude oil and petroleum product prices have stabilized at a level below a year ago, and there is no fear of an imminent supply disruption.

Natural gas consumption also will increase this year.

Last year natural gas benefited from high prices for fuel oil, and demand rose. This year gas demand will get a boost from the combination of economic growth, colder weather, and competitive prices.

The only major concerns are world oil productive capacity and adequacy of industry stocks. With production from Iraq and Kuwait curtailed, productive capacity isn't large enough to meet world winter demand. Some of the surge in seasonal product demand will have to be met from stocks. This is particularly critical because there is some doubt about the sustainable level of Soviet production.

As a result of the Middle East war earlier this year, world crude capacity has been sharply reduced. Data on world demand vs. world crude supply and capacity indicate a tight market this winter. It appears that stock levels will be able to fill the gap between supply and demand. However, a big surge in demand could produce some short term market tightening and a corresponding increase in prices.

FORECAST HIGHLIGHTS

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

Domestic demand for distillate and residual fuel oil will average 4.53 million b/d, up 8.5%. Total demand, including fuel oil exports, will average 4.985 million b/d, up 6.4% from last winter.

Exports will fall 10.4% to 455,000 b/d. Distillate exports rose sharply last year, increasing 175,000 b/d to 266,000 b/d. They will slip this year to 210,000 b/d as domestic demand advances.

Total fuel oil imports will jump 22.5% to 735,000 b/d to meet the increase in demand.

Imports of residual fuel oil will rise 16.5% to 465,000 b/d. Resid imports fell sharply last year, reflecting a slump in demand. Distillate imports also will rebound this year, increasing 34.3% to 270,000 b/d. Distillate imports fell 40.7% last winter.

U.S. refinery production of fuel oils will move up 4% to 3.995 million b/d this winter.

Fuel oil supplied from stocks will be slightly higher this winter than last.

Stocks will provide about 255,000 b/d, compared with 243,000 b/d last year. This is up sharply from only 151,000 b/d supplied from stocks in the 1989-90 winter.

Fuel oil stock levels are similar to those of a year ago. The American Petroleum Institute reported total stocks of distillate and residual fuel oil at the end of September at 185.2 million bbl, compared with 185.4 million bbl at the same time in 1990. Crude oil stocks this year are down slightly, 1.1%, but still quite adequate at 338.8 million bbl.

U.S. demand for natural gas will rise 2.1% this winter to 11.18 tcf. Demand last winter was up 1.4% at 10.955 tcf.

DISTILLATE DEMAND

Demand for distillate fuel oil will rise 8% this winter to an average 3.275 million b/d. This follows a decline of 9.4% last winter to 3.032 million b/d.

Until the decline last winter distillate demand had been moving up since the recent low in the winter of 1982-83 at 2.739 million b/d. Steady economic growth and relatively low prices stimulated demand from 1982 through 1989. But warmer than normal weather has reduced demand the past two winters.

Distillate demand peaked in 1976-77 at 4.111 million b/d, then fell for 6 consecutive years, declining 1.372 million b/d or 33.4% to the recent low in 1982-83. The drop in demand was mainly due to conservation and fuel switching brought on by large, rapid increases in prices. The average price of No. 2 heating oil jumped to $1.194/gal in 1981 from 41.8/gal in 1976.

The price dropped steadily in 1981-87, falling to 80.3/gal and stimulating demand. With increased demand prices advanced after 1987 to average 900/gal in 1989. The conflict in the Middle East led to higher crude oil and fuel oil prices in 1990, and the average price of No. 2 distillate moved up to $1.062/gal. The average price during the winter heating season last year was $1.164/gal, up 19% from the previous winter.

Steady economic growth from 1982 through mid-1990 stimulated distillate demand for transportation. The diesel fuel transport fleet increased along with the economy at a faster pace than the improvement in fleet fuel efficiency. However, lower economic activity last winter slowed the increase in transport demand for diesel. The slow revival of economic activity will give a marginal boost to transport sector demand this winter.

Refinery production of distillate will rise 3.1% this year to 2.98 million b/d. Imports will be up sharply, increasing 34.3% to 270,000 b/d. Imports of distillate slipped to only 201,000 b/d last winter following 339,000 b/d in 1989-1990 and 365,000 b/d in 1988-1989.

The supply contribution from stocks will increase this year to 235,000 b/d, from 207,000 b/d last year and only 134,000 b/d the winter before. Refiners entered the winter heating season with higher distillate stocks. Some concern about adequate world crude supply this winter encouraged refiners to boost stock levels earlier in the year.

RESID DEMAND

Demand for residual fuel oil will jump 9.7% to 1.255 million b/d this winter. Demand last year was 1.144 million b/d, down 20.8% from the winter of 1989-90. The surge in prices last winter, coupled with the recession, depressed demand for resid.

Resid demand is more sensitive to price because many utilities and industrial plants can switch to other less expensive fuels, mainly natural gas.

When prices fell sharply in 1986 electric utility demand for heavy fuel oil jumped 36.1% to 592,000 b/d. Resid demand fell 14.9% to 504,000 b/d in 1987, when prices rebounded. Demand increased again with lower prices in 1988, moving up 24.5% to 627,000 b/d.

Low prices at the start of 1989 and extremely cold weather at the end of the year helped boost demand 5.4% to 661,000 b/d, even though the average price for the year rose. Reduced power production from nuclear plants earlier in the year also helped boost utility resid demand in 1989. In 1990, the conflict in the Middle East sparked prices at the end of the year and demand by utilities fell 25% to only 497,000 b/d.

A substantial portion of resid supply is from imports. Imports this year will rise 16.5% to 465,000 b/d. Imports last winter averaged 399,000 b/d, down sharply from 604,000 b/d the winter before and 808,000 b/d the winter of 1988-89.

Refinery output will advance 6.7% this winter to 1.015 million b/d. There is some refining excess capacity for resid, but any surge in demand probably will result in a higher level of imports.

Resid stocks were slightly lower at the start of this heating season, down 3.2% at 47.8 million bbl. Stock withdrawals are expected to contribute 20,000 b/d, compared with 36,000 b/d last winter.

REFINING CAPACITY, STOCKS

In recent years U.S. refiners relied more on spare refining capacity and product imports to meet the seasonal surge in fuel demand. That was in contrast to large swings in fuel oil stocks that formerly marked refining operations. Stocks have played a reduced role in winter fuel supply.

This pattern will not change completely, but stocks will play a somewhat more significant role this winter.

The pattern also changed slightly last year as fuel oil stocks provided 253,000 b/d of winter fuel oil supply, compared with 208,000 b/d in the winter of 1988-89 and only 151,000 b/d in the winter of 1989-90,

The big change the last 2 years has been an increase in supply of distillate fuel oil that has come from stocks.

Distillate stocks at the end of September this year were 137.4 million bbl, compared with 136 million bbl a year ago and only 123 million bbl in 1989.

Residual fuel oil stocks were 47.8 million bbl at the end of September this year, compared with 46.3 million bbl last year and 49 million bbl in 1989.

API tallied U.S. operable refining capacity at 15.708 million b/d in September this year, compared with 15.702 million b/d in September 1990.

Average input to crude distillation units was 13-985 million b/d in September, leaving excess capacity of 1.723 million b/d. This was a utilization rate of 89%, down slightly from 91.1% a year earlier.

September is a key month in building inventory, and utilization rate is usually high.

The input to distillation units fell to 13.284 million b/d the week of Oct. 25, 1991, and utilization rate slipped to 84.6%. Excess capacity rose to 2.424 million b/d, leaving some leeway for increased runs if there is a big jump in demand.

Product stocks and crude oil stocks at the start of the heating season, end of September stocks, are close to the level of a year ago and somewhat higher then the previous few years.

Crude oil stocks at the end of September were 338.8 million bbl, compared with 342.6 million bbl at the same time a year ago.

Distillate stocks at the end of September this year were 137.4 million bbl, up 1% or 1.4 million bbl higher than they were a year ago. Stocks going into the heating season are higher than they were the past four winters.

The stock level represents 42 days of expected winter distillate demand, down from 44.9 days last winter.

Seasonal demand swings aren't as great as in the past, and the industry tends to operate with lower initial winter stock levels.

During 1974-1983, end September distillate stocks averaged 61 days of winter demand.

Distillate stocks are expected to be drawn down to about 98 million bbl at the end of the heating season, end March 1991.

The National Petroleum Council, in its study of petroleum storage and transportation, placed the minimum operating inventory for distillate at 85 million bbl. According to the NPC definition, operating problems and shortages would appear below that level.

Resid stocks at the start of the winter were 47.8 million bbl, down 3.2% from the level last year. Resid stocks represent about 38.1 days of expected resid demand, compared with 43.2 days last year.

Supply from resid stocks is expected to represent only a small portion of total resid supply-1.3% or 20,000 b/d. Last winter, stock drawdown averaged 36,000 b/d, or 2.6% of supply.

In recent years, resid stocks have not supplied much of resid consumption. Refiners have relied on refinery production and imports to supply the resid market. The minimum operating level for resid stocks is 30 million bbl, so there does not appear to be a potential threat of stocks being drawn down to a level that would cause operating problems.

At the start of the heating season this year crude stocks were 338.8 million bbl, down 3.8 million bbl, 1.1% below a year ago.

PRICE LEVELS

The average price of world export crude oil has risen marginally in the last few months as refiners moved to secure adequate supplies for the winter.

After markets settled following the Persian Gulf War the price was at $16,52/bbl the second week of March. The price then moved up slowly to $18.92/bbl at the end of September, the start of the heating season. Price continued to rise and had reached $20-05/bbl the week of Oct. 18, the latest data available.

The prices of heating oils has been following crude oil prices and advancing in recent weeks. However, heating oil prices are well below year ago levels.

Energy Information Administration data for the week of Oct. 18 shows the spot price of No. 2 heating oil, the New York Harbor reseller barge price, at $29.06/bbl, up from $22-59/bbl at the end of June. However the price is well below the $40.05/bbl the same week a year ago.

The residual fuel oil spot price was $15.50/bbl, up from $12-65/bbl at the end of last June but down from $26-25/bbl a year ago.

The lower prices this heating season will somewhat improve the competitive position for heating oil and lessen the incentive for conservation. But the price is still relatively high compared with coal and natural gas. So major consumers will turn to heating oil only when alternatives are not available.

Natural gas prices this year are showing the seasonal fluctuations seen the last few years. Spot and futures market prices have been rising with the increased winter demand for natural gas.

The price of gas on the New York Mercantile futures market had risen to $2.04/MMBTU the week of Oct. 25 from $1.22/MMBTU the week of July 1. The recent price is below the year ago level of $2.37/MMBTU.

Since the end of June gas prices have moved up 67.2%, while resid prices are up 22.5% and distillate prices up 28.6%. Compared with levels a year ago, gas prices are down 13.8%, resid down 41%, and distillate down 27.4%.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.