N.E. oil inventories plummet

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N.E. oil inventories plummet

Shortfall exposes consumers to more bid spikes in prices

By Kimberly Blanton, Globe Staff, 9/28/2000

nventories of heating oil have plummeted in New England, approaching lows reminiscent of the 1970s and exposing consumers to further price spikes as winter demand increases.

The federal Energy Information Administration said yesterday that stocks of heating oil shrank by another 300,000 barrels over the past week to 4.3 million barrels now available to retail distributors in New England. Current stocks are less than one-third of the heating oil available in the region at this time last year, when stocks were 14.2 million barrels.

Falling stocks in September are an alarming trend for consumers in a year in which gasoline prices have already surged to astronomical levels. Energy analysts attribute the low inventories of heating oil to the bizarre dynamics of oil supply, demand, and distribution, as well as a volatile spot market for crude oil and refined products.

But the bottom line, for consumers, is sharply higher heating oil prices. Retail prices are rising to between $1.30 and $1.40 a gallon this winter, up from $1 last winter and 80 cents in the winter of 1998. Analysts warn prices may rise further if supplies are not replenished or if the winter is particularly cold.

''I think we will have enough [oil supply], but it's a price gouging going on,'' said John Patterson, co-owner of Star Five Oil Co. Inc., which delivers heating oil to southern sections of Boston, including Dorchester and Mattapan.

Patterson said his wholesale supplier, which he would not name, ''cut us off.'' Star Five has been able to purchase only 500,000 gallons of heating oil this fall in preparation for winter - half of what he needs. As a result, he said he was forced in July to start turning away customers seeking to buy oil on contract and lock in a budgeted monthly price. ''I feel for them,'' he said.

Jonathan Cogan, a spokesman for the Energy Information Administration of the US Department of Energy, said that low inventories put customers at greater risk of price shocks.

''The inventories supply cushions and provide time for the market to react to changes in demand,'' Cogan said. ''The more cushion you have, the less pressure there is on prices going up when there is increased demand.''

Heating oil is responding to crude prices on world markets that surged to a 10-year high of $37.80 per barrel last week but have fallen slightly since then.

President Clinton, in an effort to boost oil supplies and counteract soaring world prices, announced last week that his administration would release 30 million barrels of crude oil from the federal government's Strategic Petroleum Reserve.

But analysts said it would take weeks, even months, for that crude to be refined and find its way into heating oil tankers. Phil Flynn, senior market analyst at Alaron Trading Corp. in Chicago, said the low inventory levels being reported ''bring home the fact that even if we tap the reserve, it isn't going to help with heating oil for a while.'' Since inventories are low, ''there is not much that anyone can do about it at this time.''

While the Organization of Petroleum Exporting Countries, or OPEC, has much control over the price of petroleum on world markets, the price is also influenced during distribution. Middle Eastern or Venezuelan oil producers sell to refiners in Europe and along the Gulf Coast in Lousiana and Texas, who then sell to wholesalers around the country. Wholesalers, in turn, sell to the retailers who fill customers' tanks.

Oil can always be purchased, if the price is high enough. The problem this winter, analysts say, is that wholesalers are not stocking up. They have no incentive to purchase oil early, when prices are extremely high, only to see prices fall during the winter months. Indeed, prices being traded in oil futures markets indicate dealers are betting prices will decline later this year.

Meanwhile, inventory levels are behaving like a downward spiral, continuing to pressure prices customers pay to refill oil tanks. New Englanders are more dependent on heating oil than most regions of the country. In Massachusetts, about 1 million of the state's 2.5 million households use oil heating systems.

Nationwide, heating oil stocks also fell last week by 600,000 barrels, to 47.5 million barrels, said the Energy Information Administration. Last year, US inventories were 72.5 million barrels. Inventories are measured at the refinery and wholesale level and do not include stocks held by heating oil delivery firms.

Aside from a brief drop in 1996, inventories haven't been this low since the 1970s when OPEC quadrupled oil prices.

The looming heating-oil crisis demonstrates the urgency of placing requirements for minimum inventory levels on wholesalers, said Joseph Kennedy, a former Massachusetts congressman who now is chief executive of Citizens Energy Corp. Citizens provides subsidized heating oil to Massachusetts residents on fixed or low incomes who are especially vulnerable to high home heating costs.

Kennedy said a national inventory of heating oil, built up during the summer months, would avert supply crunches that often hit New England residents in the fall. A runup in heating oil prices last January cost Massachusetts residents an additional $150 million in heating costs, he said, while the cost of storing heating oil would have been only about $5 million.

''All I'm saying is, `Why don't we buy ourselves a little insurance?''' Kennedy said.

Not everyone is pessimistic about oil costs. Some argue that prices can only go down in coming months as refiners get more product into the pipelines. ''I believe the prices have peaked already,'' said Alfred Slifka, president of Waltham-based Global Petroleum, one of the largest heating oil wholesalers in the Boston area.

But Energy Department figures show that US inventories are shrinking even though there was a small rise in the amount of petroleum being refined into heating oil. Analysts said this is another indication wholesalers are holding back from replenishing stocks.

Jack Sullivan, chief executive of the New England Fuel Institute, whose members are mainly heating oil retailers, said stocks are low because of a booming economy and high demand by truckers for diesel fuel, a sister refined product to heating oil.

Sullivan said Americans now consume 4.1 million barrels of heating oil per day but only 3.8 million barrels are being refined. ''We've got a shortfall of 300,000 barrels a day,'' he said.

Record low inventories of natural gas this winter could, indirectly, drive up demand for heating oil. During the coldest months, gas suppliers typically cut off big users of natural gas, such as hospitals and universities, and divert supplies to homeowners who pay higher prices. Massachusetts utilities have requested a 22.7 percent increase this year in natural gas prices, effective in November.

''The gas company interrupts their service so they go directly to heating oil,'' Sullivan said. This winter, he predicted, ''it will happen and my speculation is it will happen sooner than before.''

http://www.boston.com/dailyglobe2/272/business/N_E_oil_inventories_plummet+.shtml

-- Martin Thompson (mthom1927@aol.com), September 28, 2000

Answers

When you start reading about wholesaler cut-offs of supply to their retail dealers, this is a bad sign....indeed.

-- R2D2 (r2d2@earthend.net), September 28, 2000.

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