NEW YORK (Reuters) - Fuel distributors in the U.S. Northeast are preparing for an uncertain heating oil season this winter, with some locking in additional contracts, as upcoming global sulfur regulations are due to pull on distillate fuel demand, market participants said.
The East Coast region has become vulnerable to price increases this winter, traders said, citing new shipping rules limiting sulfur content in refined fuels, along with the shutdown of Philadelphia Energy Solutions’ 335,000 barrels-per-day (bpd) refinery complex, a key supplier for the region.
Those factors could squeeze heating oil supply, they said, while unplanned refinery outages could exacerbate any constraints. Fuel distributors said they were trying to get ahead of this problem to ensure adequate winter supply. During sudden cold snaps, the need for heating oil jumps sharply in a region that relies more on the fuel than any other part of the United States.
Households in the Northeast account for about 80% of total U.S. households that use heating oil, according to the U.S. Energy Information Administration (EIA). About 5.7 million U.S. households use it as their primary fuel. Heating oil closed at $1.7532 a gallon on Wednesday, the lowest since January, but prices tend to rise in the winter.
Strategies to prepare for the season vary by distributor, said Christian Herb, president of the Connecticut Energy Marketers Association.
“Some members on the retail side are definitely taking action to lock in some more gallons,” Herb said. “More people are taking some additional actions than in previous years.”
The East Coast relies on waterborne international imports as well as shipments from the Gulf Coast via Colonial Pipeline for much of its fuel supply needs.
Local refiners help supply the rest. However, some of that supply will be unavailable after PES decided to shut its Philadelphia-area refinery, the largest in the region, due to a fire in late June. The facility produced an estimated 125,000 bpd of gasoline and 110,000 bpd of diesel, according to a note from Wood Mackenzie.
“That region does supply the Northeast with petroleum products that are now going to need to be either shipped in via Colonial or shipped in externally,” said Sean Cota, CEO of the New England Fuel Institute, a trade organization.
Cota said the effect from shipping regulations is less predictable. “We are concerned about the consumer having supply,” he said.
NEFI is encouraging heating oil retailers to secure a portion of their physical supply during the transition to the new shipping fuel rules through supply agreements. Such contracts are common in the propane industry, but are less widely used among heating oil distributors, he said.
The new low-sulfur rules, aimed at reducing air pollution in sea-going vessels, require ships globally to use fuels with a sulfur content below 0.5% beginning Jan. 1, 2020, down from 3.5%. The rules, known as IMO 2020, are expected to tighten supplies of distillates globally, including diesel and heating oil.
While market participants anticipate that imports from regions including Europe will fill any supply gaps this winter, new IMO regulations mean increased distillate demand around the world could encourage shippers that typically export to the Northeast to keep supplies in Europe.
IMO 2020 “throws variability into what the expectations are for the season,” said Quincy Longacre, executive vice president of the Better Home Heat Council of the Lehigh Valley in Pennsylvania. “There may be some sourcing of product that is somewhat out of the ordinary historically speaking.”
Reporting by Stephanie Kelly and Jessica Resnick-Ault; Editing by David Gregorio