July 16, 2008
Heating Oil Stocks Reach Record Lows

With crude oil capturing much of the headlines of late, little notice has been given to another developing energy story – residential heating oil. As shown in the chart, heating oil stocks (reserves) have reached their lowest levels since 1993 when the Energy Information Administration (EIA) started keeping track of this statistic.

Diesel fuel, a similar refined oil product that contains less sulfur, has also been in short supply, placing a large premium on diesel fuel over gasoline. These related trends prove that refiners are having trouble meeting demand for distillate products.

Most disturbing of all, heating oil dealers in the Northeast U.S. (which contains 70% of the 7.7 million U.S. oil-heated households) are reporting that only 20% of their customers have prepaid for future delivery, when normally 50% have done so by this time of year. Pre-pay contracts lock customers into set rate delivery prices for next year’s fuel, and force suppliers to place orders at the refineries within ten days. Part of this delay is also due to small dealers that don’t have enough credit to buy heating oil futures (that they need to guarantee their supply) at prices that already exceed US$4 per gallon; many of these dealers haven’t sent out pre-purchase order forms to their customers yet.

This gives rise to the possibility of an ugly scenario where oil dealers and homeowners scramble to fill their oil tanks at the last minute, causing a rush of orders at the refineries that could drain the last of floundering heating oil reserves and send prices to new heights.

 

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