Low Stocks Set Stage for Price Volatility

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• This distillate price spike is a classic response to a local supply and demand imbalance that began as a result of low distillate stocks.

• Low distillate stocks in the winter create the potential for price volatility. In this situation, unexpected high demand from cold weather or sudden loss of supply can quickly deplete low stocks in local areas for a time, requiring unusual movement of stock from other areas. As buyers search for product, they bid prices up rapidly, which attracts product, but the time lag can cause prices to rise very high briefly before product arrives.

• Low stocks of distillate fuels at the end of 1999 left heating oil markets in a vulnerable position. Stocks began the winter of 1999/00 well above average. They deteriorated somewhat as low margins kept refiners from continuing to build inventories along the lines of the normal pattern. Stocks were still well within the normal range at the end of November, but declined much more than usual in December, ending the year 6% below the low end of the normal range.

• Thus, as we went into our two biggest distillate demand months, January and February, U.S. distillate stocks were very low -- particularly on the East and Gulf Coasts. The East Coast is the primary heating oil region, and it depends heavily on production from the Gulf Coast as well.