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This Week in Petroleum

Release date: November 14, 2019  |  Next release date: November 20, 2019

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Low distillate inventories contribute to higher heating oil price forecast

Distillate inventories in the Northeast United States (Petroleum Administration for Defense Districts, or PADDs, 1A and 1B), which include heating oil, were 24.4 million barrels on November 8, 37% below the below their previous five year (2014–18) average (Figure 1). Northeast distillate inventories remained below the previous five-year average every week this year, but remained within the previous five-year range until late-September when inventories in the Northeast fell below this range. Customers in the Northeast rely on heating oil more than in any other region; about 20% of households in this region use heating oil for space heating. Pricing dynamics in distillate futures are currently consistent with low inventory levels. The U.S Energy Information Administration (EIA) believes that heating oil prices will likely increase and revised its heating oil price forecast up in the November Short-Term Energy Outlook (STEO) to reflect the current supply tightness in the Northeast.

Figure 1. Northeast distillate inventories

The structure of New York Harbor (NYH) distillate futures prices are consistent with low distillate inventories. When prices for longer-dated contracts in the future are higher than front month (the next contact month) prices, the market provides a financial incentive to store petroleum products in order to receive a higher price at a later date. This condition is known as contango. However, prices are currently in backwardation, the condition when near-dated contracts are priced higher than longer-dated contracts, providing an incentive to draw down inventories (Figure 2). On November 8, the spread, or difference, between the front month contract and the contract for delivery in three months (the 1–3 spread) was 1.6 cents per gallon (gal) backwardated, and the 1–6 spread was 6.5 cents/gal backwardated. The previous two times that spreads reached these levels were in January 2018, when an unusually cold weather event known as a bomb cyclone occurred, and September 2017, when Hurricane Harvey disrupted Gulf Coast refineries and their supply chains. When these events occurred it put short-term pressure on distillate supply, which increased the near-term contracts more than the longer-term contracts, creating significant backwardation. With the high levels of backwardation, the market provides little incentive to store petroleum products.

Figure 2. New York Harbor ultra-low sulfur diesel futures price spreads

Several factors could be contributing to the recent high levels of backwardation. In general, as heating oil becomes an increasingly small share of the U.S. distillate fuel market (down to about 20% of households in the Northeast compared with 25% seven years ago), the NYH futures curve increasingly reflects global distillate market conditions as opposed to regional supply and demand dynamics. U.S. refinery runs were low in October as refineries undertook seasonal maintenance, which reduced distillate fuel supplies. Additionally, the September 14 attacks on Saudi Arabia’s oil infrastructure contributed to global distillate supply tightness and likely increased backwardation in the NYH futures spreads. Saudi Arabia, which is an important exporter of distillate fuel, cut refinery runs in order to supply crude oil to its export customers, reducing exports of distillates to the global market.

All of this was happening in a market that was already experiencing a supply disruption with the Philadelphia Energy Solutions’ (PES) refinery closure, which had a capacity of 335,000 barrels per day (b/d). Based on EIA’s refinery capacity report and the East Coast estimated refinery distillate yield of 29.5% in 2018, PES produced nearly 100,000 b/d of distillate. However, as seen in Figure 1, there was not an immediate sharp fall in inventories following the refinery outage. Also, following the refinery outage, the price for diesel in the East Coast did not significantly increase.

New supplies of distillate can either come from imports or other PADDs. Pipeline infrastructure linking the Gulf Coast and the East Coast as well as international trade play key roles in balancing the mismatch between supply and demand within PADD 1, which consumes more distillate than it produces. However, imports did not immediately increase after the PES outage. PADD 1 distillate fuel imports averaged 100,000 b/d from July through October, down by 24,000 b/d from the same period in 2018. The January–August (the latest data available) East Coast receipts of distillate from other areas of the country averaged 54,000 b/d more than last year. With just over half of total U.S. refining capacity, the Gulf Coast (PADD 3) is the largest domestic supplier of transportation fuels to PADD 1. However, there is not significant excess pipeline capacity linking PADD 3 to PADD 1. Thus, any increases in domestic shipments would have to come from other areas.

The recent ruling of Pennsylvania’s Public Utility Commission to allow shipments on the Laurel Pipeline into Western Pennsylvania beginning on October 1, 2019, may provide an additional source of diesel fuel into the East Coast from the Midwest. EIA will provide insight into how shipments from the Midwest have changed when the October data are released in December 2019.

There appears to be some signs that distillate market conditions are easing. Futures curve spreads have moved toward contango recently, and if they continue to move in that direction it should provide a market-based economic incentive to build inventories. More recently, weekly imports of distillate into the East Coast increased to more than 200,000 b/d for the weeks ending November 1 and November 8, bringing the four-week average up to 179,000 b/d, compared with the 2018 annual average of 146,000 b/d. During the past five years, when the price of ultra-low sulfur diesel in NYH has increased relative to the price of ultra-low sulfur diesel in the Amsterdam-Rotterdam-Antwerp (ARA) region in Northern Europe, imports into the East Coast tended to increase (Figure 3). In 2019, the October 4 to November 8 average weekly price premium was 8 cents/gal, indicating that a price incentive to import diesel into the East Coast is likely occurring. If the price premium persists, imports into the East Coast could continue to rise and increase inventories.

Figure 3. East Coast distillate imports and New York Harbor - American-Rotterdam-Antwerp price spread

While inventories remain low, however, a significant, extended cold weather event like the one seen in January 2018, could cause significant heating oil price increases. In the November 2019 STEO, EIA forecasts the retail price for home heating oil to average $3.05/gal during the 2019–2020 winter (October–March), up from $3.02 in the October STEO. The price for home heating oil for the remainder of the winter (November–March) is forecast to average $3.08/gal, up six cents compared with the October STEO forecast for the same period. The increase is partially driven by higher forecast crude oil prices. In the November STEO, EIA revised its Brent crude oil price forecast for November to March up by $0.80 per barrel (b) to $59/b. The crude oil price increase is responsible for about two cents of EIA’s forecast home heating oil price increase. The remainder of EIA’s forecast six-cent increase reflects our assessment of the low distillate inventories and potential availability issues.

U.S. average regular gasoline and diesel prices increase

The U.S. average regular gasoline retail price rose 1 cent from the previous week to $2.62 per gallon on November 11, 7 cents lower than the same time last year. The Gulf Coast price increased by more than 3 cents to $ $2.26 per gallon, the Rocky Mountain price increased by nearly 3 cents to $2.82 per gallon, and the Midwest price increased by 2 cents to $2.44 per gallon. The West Coast price decreased by more than 1 cent to $3.59 per gallon, and the East Coast price fell by less than 1 cent to $2.47 per gallon.

The U.S. average diesel fuel price rose by 1 cent to $3.07 per gallon on November 11, 24 cents lower than a year ago. The Rocky Mountain price increased by nearly 4 cents to $3.20 per gallon, the Midwest price rose by nearly 2 cents to $2.97 per gallon, the West Coast rose by more than 1 cent to $3.76 per gallon, and the East Coast price increased by nearly 1 cent to $3.05 per gallon. The Gulf Coast price was unchanged, remaining at $2.80 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 2.5 million barrels last week to 97.7 million barrels as of November 8, 2019, 9.0 million barrels (10.2%) greater than the five-year (2014-18) average inventory levels for this same time of year. Midwest and Gulf Coast inventories each decreased by 0.9 million barrels, East Coast inventories decreased by 0.5 million barrels, and Rocky Mountain/West Coast inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 4.9% of total propane/propylene inventories.

Residential heating fuel prices increase

As of November 11, 2019, residential heating oil prices averaged nearly $2.99 per gallon, almost 2 cents per gallon above last week’s price but more than 36 cents per gallon below last year’s price at this time. Wholesale heating oil prices averaged nearly $2.03 per gallon, almost 1 cent per gallon less than last week’s price and 25 cents per gallon less than a year ago.

Residential propane prices averaged almost $1.95 per gallon, more than 5 cents per gallon higher than last week’s price but nearly 48 cents per gallon lower than a year ago. Wholesale propane prices averaged just over $0.76 per gallon, more than 7 cents higher than last week’s price but almost 6 cents per gallon below last year’s price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: distillate fuel , heating oil , inventories/stocks , STEO (Short-Term Energy Outlook)

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  11/11/19 Week Year
Gasoline 2.615 0.010 -0.071
Diesel 3.073 0.011 -0.244
Heating Oil 2.989 0.016 -0.361
Propane 1.947 0.052 -0.475

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  11/08/19 Week Year
Crude oil 57.24 1.04 -2.95
Gasoline 1.634 -0.022 0.013
Heating oil 1.918 -0.015 -0.255
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  11/08/19 Week Year
Crude oil 449.0 2.2 6.9
Gasoline 219.1 1.9 -7.5
Distillate 116.7 -2.5 -2.6
Propane 97.653 -2.515 13.893