June 15, 1997
Under assumptions of normal weather, demand for distillate fuel oil this heating season (October 1, 1996 - March 31, 1997) is projected to be only slightly greater than that of last winter. Unusually low distillate stocks, however, are expected to result in a tighter-than-normal supply situation and higher heating oil prices. This article describes findings of an analysis of the current low level of distillate stocks which are available to help meet the demand for heating fuel this winter, and presents a summary of the Energy Information Administration’s distillate fuel oil outlook for the current heating season under two weather scenarios
Distillate Stocks
An analysis of longer term historical trends in distillate fuel oil inventories appeared in the June issue of the Petroleum Marketing Monthly. It showed that distillate stocks were on a generally declining path in the 1980’s. This was largely because of petroleum industry downsizing and improving efficiencies in inventory management. That trend reversed in 1990, and stock levels were generally rising through 1994. Three factors are cited as possible causes of the turnaround: (1) Stocks were depressed by a series of colder than normal winters in the late 1980’s; (2) the Persian Gulf War in 1990-91 may have contributed to precautionary inventory building; and (3) environmental regulations imposed by the Clean Air Act Amendments of 1990 reduced the fungibility of diesel fuel and heating oil inventories. In contrast to the shift in trend in distillate stocks, gasoline and crude oil inventories have gradually declined throughout the 1980’s and the 1990’s.
The purpose of this analysis is to provide a shorter term perspective on the exceptionally low level of distillate fuel oil inventories as we enter the 1996-97 heating season, and to identify some contributing causes and potential implications of the situation.
Background
This has been a year of unusual market behavior with regard to petroleum products. Earlier this year, gasoline prices in the United States rose sharply from $1.08 in mid February to $1.29 by May 17. In response to public concern, President Clinton, on April 29, asked that the Department of Energy investigate the reasons for the runup, and prepare a report on the situation within 45 days. The report, published in June, concluded that crude oil price increases and normal seasonal gasoline price increases accounted for most of the change, but that unusual factors in gasoline markets also played a role. These unusual factors included: a late-winter cold spell causing refiners to focus longer than usual on production of distillate instead of gasoline; lower-than-normal gasoline stocks; high gasoline demand and little excess refining capacity; and persistent expectations that crude oil and gasoline prices would fall in the future, which discouraged building stocks. Now, at the beginning of the heating season, distillate fuel has replaced gasoline as the focus of concern.