The analysis titled, US Heating Oil Outlook 2004, outlines the underlying market factors that will contribute to this uncertainty. ICF Consulting prepared the report. While the current outlook indicates that the expected normal winter weather pattern can be managed, the risks of significant volatility are unusually high.
Crude oil prices have increased by more than 40 percent in the last year, leaving energy consumers to deal with the impact of higher prices on all hydrocarbon products, including heating oil. Heating oil spot market prices averaged about 74 cents per gallon in September 2003, and the current market is about $1.30 per gallon, an increase of more than 75 percent.
"In addition to dealing with higher price levels, both industry and consumers will need to carefully monitor heating oil supply patterns over the next few months, particularly refinery production and import levels from Europe, to determine if inventory builds will be adequate to ensure supply during the dead of winter," says Zeta Rosenberg, fuels vice president, ICF Consulting. "Potential could exist for some severe price spikes if unanticipated shortages occur during peak demand periods."
Given the current forecast of a normal U.S. winter weather degree-day pattern, heating oil supplies are sufficient under the following conditions: continued strong refinery operation in Petroleum Administration for Defense Districts (PADD) 1 and PADD 3; imports of heating oil at historic high levels; and building heating oil inventory in PADD 1 to at least 35 MMB by October 1, 2004. However, there are some substantive uncertainties with the potential to create significant volatility.
The main factors that will contribute to this uncertainty and volatility include: an underlying higher demand for diesel fuel in both the U.S. and Europe; abnormal maintenance downtime this fall, particularly in Europe; a refining system in the United States rarely operating below maximum capacity; changing diesel sulfur specifications in Europe; and the potential for an even harsher than normal winter in either the United States or Europe.
Early recognition of both the weather influence and the impact of European diesel specification changes will reward the industry participants who are prepared to act to manage their system or take advantage of trading opportunities. ICF Consulting’s full report is available at www.icfconsulting.com/heatingoil
