Exchanging Strategic Petroleum Reserve crude to establish a heating oil reserve amid rising prices and fears of winter shortages in the U.S. would be self-defeating.
So says Lawrence Goldstein, Petroleum Industry Research Foundation Inc. (Pirinc) president.
Low home heating oil stocks at the beginning of the winter heating season have congressmen worried. In recent weeks, inventories of heating oil have remained at 15-20% below year-ago levels, and heating oil prices have shot up almost 20¢/gal from a year ago.
Although the Energy Information Administration and the American Petroleum Institute have said heating oil supplies will be adequate this winter, some congressmen have urged the Energy Department to draw down Strategic Petroleum Reserve stocks and exchange that oil to create a heating oil reserve in the Northeast (OGJ, Sept. 30, Newsletter).
Congressmen also are concerned that supply shortages could run up prices further this winter. EIA predicted last week heating oil prices will be about 9¢/gal, or 10% higher than last winter, even under normal weather conditions.
Last week, Energy Sec. Hazel O'Leary invited representatives of the winter fuels industry to a high level meeting Oct. 18 to talk about prospects for price spikes and supply shortages for heating oil this winter.
Pirinc view
Goldstein noted distillate demand has been very strong, resulting in a low seasonal build of stocks.
He said European distillate stocks also are tight, and firms there are competing with the U.S. East coast for supplies.
Goldstein last week noted Northeastern firms have been unwilling to build stocks during the tight market.
"For example, the price for heating oil in the New York harbor today is 71.5¢/gal, and the futures price is 69.5¢/gal. Thus anyone who purchases heating oil today for use in December would be locking in a 2¢/gal loss, not including a 0.5¢/gal monthly cost for money and assuming no storage costs."
He said if the U.S. government were to enter the market, a bidding contest would drive up the price of heating oil and further discourage private stock building.
"Just as important, the market wouldn't know when the government would release these supplies. Thus they would want to hold as little inventory as possible, because the government's dumping of this oil would result in inventory losses."
"The government would be building up other costs as well. Distillate storage is not generally available in the winter. The government would have to encourage the market to lease it to them. This could be expensive."
Goldstein said the government's existing Low Income Home Energy Assistance Program (Liheap) provides all the insurance necessary to protect consumers against price increases, and it is possible the winter months will be warm, and Liheap would not have to be used extensively.
EIA, DOE views
Of the spike in heating oil prices, EIA said, "Higher crude oil costs account for about 5¢/gal of this expected increase. The relatively tight domestic supply situation and evidence that European stocks are also below last year's levels led to expected increases in supplier margins, accounting for the remainder of the increase. Colder-than-normal weather this winter would exacerbate the market tighter and push prices higher."
DOE said 12% of the nation's homes burn oil for heat, and 75% of those are in the Northeast and most of the rest are in the Midwest.
At their request, Sen. Joe Lieberman (D-Conn.), Sen. Chris Dodd (D-Conn.), and Rep. Joe Kennedy (D-Mass.) met last week with Energy Sec. Hazel O'Leary.
O'Leary pledged to seek ways to increase supplies and mitigate against price increases but also said DOE would not intervene to control prices.
She said DOE would talk with other nations about obtaining more heating oil imports and report back to the congressmen in about a week.
Lieberman plans to appeal to oil companies to voluntarily increase their stocks in the Northeast. "All of the stars are aligned for a heating oil crisis," a Lieberman aide said.
O'Leary said if prices are significantly higher, the government will approve an early release of Liheap funds. She said the program, administered by the Health and Human Services Department, had $400 million available immediately.
Industry views
The Petroleum Marketers Association of America's heating fuels committee met to evaluate the situation but rejected the establishment of a reserve in the Northeast.
It said such a plan would be counterproductive because it would drive up the price of fuel while lessening the incentive for suppliers to build their stocks.
The PMAA panel recommended the Transportation Department allow fuel oil tanker drivers to work longer hours and waive the Jones Act to allow foreign flag vessels to transport fuel from one U.S. port to another.
Charles DiBona, API president, agreed a Northeast reserve "would exacerbate the situation" because it "could induce private parties to hold even lower stocks."
And he said if the federal government was buying No. 2 fuel oil for the reserve, "You would clearly raise the price of distillate."
DiBona said, "The stock levels are less important than people assume, anyway."
He explained that during the winter, more than 95% of distillate supplies come from current production and less than 5% from stocks or imports. DiBona said refiners can make adjustments to produce a slightly higher percentage.
EIA numbers
EIA said heating oil demand should actually drop this winter, but continued growth in diesel fuel demand for transportation is expected to bring about an overall increase in total distillate demand.
In its short-term energy outlook, EIA also predicted natural gas demand will rise 2.3% this winter, compared with an increase of 6.9% last winter, mainly because normal winter temperatures are expected.
EIA's mid-price case assumes world oil prices will fall to $19/bbl in early 1997 before rising to $20/bbl by mid-1997. Prices are then assumed to decline to about $18.50/bbl by yearend 1997.
"This path is generally consistent with the pattern world oil prices have taken since the end of Desert Storm. This forecast assumes an indefinite postponement of Iraqi oil sales,'' EIA said.
The agency said unusually cool summer weather over much of the nation has freed large amounts of gas for injection into storage that otherwise would have been consumed by electric utilities and has helped to lower gas prices.
Working gas storage, while still low by historical standards, is forecast to approach last year's level by the beginning of the heating season on Nov. 1 at current high refill rates.
The outlook projects that in 1996, declining U.S. crude production and higher demand will require 8.5 million b/d of total petroleum net imports, just below the record 8.6 million set in 1977. In 1997, total net imports are projected to exceed 1977's record and equal 48% of total petroleum demand.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.
