Heating Oil Flows Under the Radar

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October 17, 2000

Heating Oil Flows Under the Radar By NEELA BANERJEE Despite the recent turmoil in the Mideast that has raised the specter of higher oil prices and supply disruptions that could make for a precarious winter, there is growing evidence that the shortfall of home heating fuel in the Northeast may not be as dire as earlier feared.

A large number of homeowners and businesses, worried that oil prices would continue to increase, appear to have stocked up earlier than in past years. And many utilities and businesses in New York and New Jersey are for the first time required to build at least a seven-day supply of heating oil before winter. As a result, there appears to be more heating oil in reserve than the official figures show, industry experts say.

For some time, supplies of crude oil have been rising, and refineries in the United States have been running nearly flat-out. Yet the price of heating oil has climbed to lofty heights, largely because the officially reported volumes in storage that serve as a buffer against events like an early cold snap or a pipeline explosion remained so low. That set off alarms among policy makers and led to a White House decision to release oil from the Strategic Petroleum Reserve to help bolster supplies.

Where has the heating oil been going? A lot more than usual at this time of year is probably already in the tanks of thousands of homeowners and in the storage sites of heating oil dealers and businesses whose stockpiles fall below the radar of the weekly statistics, according to many industry officials.

"The news stories have alerted people to the problem of high prices and low supplies, and they're filling their tanks," said John Kilduff, senior vice president for risk management at Fimat, the commodities trading unit of Sociiti Ginirale. "A lot of oil may be working its way into storage that goes unmeasured."

On a morning that still felt like the ebbing summer, for example, Ray Moss walked down his driveway in shirt sleeves and house slippers to prepare for winter. For months, he had heard that heating oil prices would rise much higher than last year and that supplies would dip much lower. So this September day, Mr. Moss led a heating oil deliveryman behind his house in East Orange, N.J., to fill the 1,000-gallon tank buried under his napkin-sized backyard.

"I bought a thousand gallons ahead of time to make sure I had enough oil," he said, with a satisfied smile. "I purchased this oil just before prices went up."

To be sure, prices this winter are expected to average roughly 25 percent higher than last year and unusually harsh weather could make the situation worse. Last week, after reports of a dip in official inventories, the wholesale price for heating oil closed at $1.0161 a gallon on the New York Mercantile Exchange, compared with 59.61 cents a year ago and a peak during the past winter of 95.2 cents on Jan. 31. The price closed yesterday at 97.23 cents.

"This is an issue of affordability, not availability," said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York. "The government should be concentrating on protecting those who can least afford high fuel prices."

Though the lag in oil stockpiles has swept into public consciousness only recently, the problem has been building over the last three years. It started with a decision taken by the Organization of the Petroleum Exporting Countries in late 1997 to increase supply, followed quickly by a sharp cutback when prices collapsed. That unleashed months of seesaw prices, fluctuating oil supplies and market jitters that, together, have left the Northeast and Midwest with the lowest levels of official heating oil reserves in four years.

As of last week, official inventories were about 35 percent below last year's levels. And problems at the edges of the supply-and-demand equation are likely to keep stockpiles low. Many refineries plan to shut down for a few weeks in October and November to carry out necessary maintenance. Higher prices for heating oil in Europe had also been drawing fuel overseas.

But absent an unexpected supply interruption from the Persian Gulf or an unusually severe winter, the uncounted extra supplies in the hands of businesses and homeowners, together with the newly refined oil now working its way through the system, should be enough to allow the Northeast region, where heating oil use is concentrated, to squeak through without a major disruption, economists say. Indeed, only about 10 percent to 15 percent of heating oil consumed in winter comes from industry inventories, with the bulk of fuel moving to consumers straight from refinery production.

The weekly statistics from the American Petroleum Institute, which is a trade association, and the federal Energy Information Administration measure inventories held at major refining and storage operations, but not the oil stockpiled by heating oil retailers and consumers.

In the manicured villages and fraying industrial hubs of northeastern New Jersey, every twist and turn of the heating oil market is followed closely these days. As he makes his rounds delivering oil for the J. W. Pierson Company of East Orange, Paul Smith, a burly man with a graying goatee, serves as a cross between town crier and Wall Street forecaster.

One morning, Mr. Smith climbed down from the cab of a truck carrying 3,000 gallons of heating fuel, and two scruffy young men in a pick-up stopped to ask, as others would throughout the day, which way oil prices were moving. His employer has schooled him and the 11 other drivers to handle pointed questions from customers. "They told us what we might expect. You know: `Why is the oil so high?' and `What's the matter with you people?' " Mr. Smith shouted over his truck's grinding engine. "Mainly, I tell them it has to do with low oil reserves."

While far from panicking, customers have been calling heating oil dealers more often, arranging to prepay for fuel and asking for deliveries earlier than in past years. Many view the price jumps as temporary.

"Things go up and things go down, and that's where my faith in the situation comes from," said Nat Testa, as Mr. Smith filled the tank behind the two-story building that houses his advertising agency in Montclair, N.J.

Low-income consumers suffer most from high fuel prices. On Sept. 23, the White House released an additional $400 million in federal money to help low-income people with heating bills.

And before it tapped the reserve for up to 30 million barrels of government-owned oil, the White House dealt with this year's rising prices by prodding OPEC to increase production. The cartel has raised exports by about three million barrels a day since March.

The larger supply of oil should normally have dampened prices more by now. But even operating flat-out, refineries have not managed to build extra inventory. "The problem is not from what OPEC is producing now, but what it cut a few years ago," Mr. Goldstein said.

Lower supplies meant less oil entered refineries. When a barrel of crude is refined, about half the yield is gasoline and about a quarter of it is middle distillate, a category that includes diesel and heating oil. Refineries can tweak the proportions only slightly, increasing one product at the expense of another by about 3 to 5 percentage points. This year, refiners configured crude runs to maximize gasoline production, which crimped middle distillate. Moreover, much of the middle distillate was diesel, which was quickly consumed by factories and businesses.

Since late summer, refineries have been playing catch-up. High heating oil prices make it attractive for them to stretch middle distillate output. Refineries are now producing more heating oil every week than they did last year.

Traders and refiners have little incentive to hold on to inventories, however, because heating oil prices are expected to fall in the future. As a result, they are eager to sell the heating oil now at a good price rather than wait for a better price.

Heating oil distributors in the Northeast have been buying the oil and either storing it themselves or selling it to business and residential customers. "I'm grabbing the oil as quickly as I can get it because my customers want it," said John Depken, an owner of the Keller-Depken Oil Company in Hasbrouck Heights, N.J. "They're afraid if they call next week, I won't have any oil and that's not true. I have firm contracts and am kind of oversupplied because I thought this would be a problem."

Among the biggest purchasers are industrial and commercial operations with interruptible natural gas contracts, which permit them to buy gas at a discounted price in return for allowing their utility to shut off the supply when demand is high. The enterprises then switch to generators often powered by heating oil.

New York and New Jersey now require companies with interruptible contracts to build a seven-day supply of heating oil before winter. The states want to avoid the panic that occurred last February, when companies rushed to the oil market after their gas was shut off during a cold snap. Coupled with the demand from homeowners, heating oil prices doubled last winter.

The College of New Jersey, like many large buyers that suffered gas supply interruptions and heating oil price spikes last winter, acted even before it received the state mandate. When its natural gas is turned off, the college near Trenton requires 10,000 gallons of heating oil daily. Concerned about high prices, it locked in three to four weeks' supply over the summer at 91 cents a gallon.

To meet the strong demand for oil products, refineries have been operating at close to full capacity. But some will have to shut down this fall for routine but crucial maintenance. The American Petroleum Institute estimates that about 5 percent of the country's refining capacity will be affected by such breaks over the next month, further limiting the flow of heating oil.

"We're running 24 hours a day, seven days a week, and the wear- and-tear gets to a point that we can't run our equipment safely," said Jefferson F. Allen, president of the Tosco Corporation, which supplies about 15 percent of the Northeast's heating oil.

Another factor that has limited supplies is the export of fuel to Europe, where lower inventories in countries like Germany have pushed prices even higher than in the United States. But several refiners, at the request of the Energy Department, agreed last week not to export heating oil for a while, according to Platts, an oil industry newsletter.

And higher prices will ultimately replenish supplies. Fuel will move to where it commands the most money. When prices rocketed during last February's cold snap, heating oil rushed into the Northeast, as companies took advantage of steep prices. High crude prices have encouraged oil-producing countries and petroleum companies to increase exploration and production. When that new oil starts to flow next year, crude prices will most likely decline.

And as high prices lead to greater production, they also cool demand, easing the pressure further. "High prices will reduce demand over the long run," said Jerry Taylor, director of natural resources at the Cato Institute, a public policy research group in Washington. "Today's price bubble will burst of its own accord."

http://www.nytimes.com/2000/10/17/business/17HEAT.html



-- Martin Thompson (mthom1927@aol.com), October 17, 2000


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