Cold weather unlikely to ease U.S. heating oil glut

NEW YORK (Reuters) - A cold start to the winter in the giant U.S. Northeast heating oil market is unlikely to be enough to drawdown swollen fuel stockpiles in the region.

After an unusually mild November, the mercury is now expected to hold below normal levels for the rest of December after a storm brought a heavy snow last week to the U.S. Northeast, the world’s largest heating oil market.

The cold spurt will do little to drain plump heating oil inventories in the region, which stand about 38 percent higher than a year ago and nearly 30 percent above the five-year average in the Northeast.

However, consumers in the region should not expect lower home heating costs this winter as high crude oil prices are likely to filter through to heating oil values.

“Here in our market in the East Coast, we are swimming in the stuff,” Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania, told Reuters. “Don’t worry about heating oil costs in the Northeast this winter.”

In New England alone, heat oil stocks are now at 11 million barrels, up from 6.6 million barrels last year.

The national supply cushion for total distillate fuels, which include heating oil as well as diesel, now tops 47 days, up from about 33 days a year ago, according to the most recent government data.

U.S. stockpiles of distillates were 167.3 million barrels in the December 4 week, near a 26-year high, according to recent weekly Energy Information Administration (EIA) data. <EIA/S>

Distillate inventories have climbed this year as the weak economy batters industrial demand. U.S. distillate consumption demand over the 4 weeks to December 4 was down 8.3 percent from a year ago, according to EIA data.

“We would be surprised if this cold weather changes the demand picture here, but it is the first real hope demand has had, and traders bought into it,” said Peter Beutel, President of Cameron Hanover, a New England-based consultancy.

“It will take seven solid and sustained weeks of this kind of cold to eat into inventories, but the heart of winter is starting according to plan.”

While many forecasters have called for a cold early winter, which officially begins in the United States on December 21, predictions further out for the heating oil-reliant Northeast are mixed.

“It appears more likely than not, the last half of December will remain colder than normal across the eastern half of the country,” said Jim Rouiller, Senior Energy Meteorologist at Planalytics.


Despite ample supplies, consumers could still see a slight uptick in prices this year due to a rise in the cost of crude oil, which has risen since last year on expectations a turnaround in the economy could boost fuel demand.

EIA last month estimated the average heating oil price in the Northeast will be $2.81 a gallon this winter versus last winter’s $2.66 a gallon. This means heat oil expenses for the average household will be $2,009, up only 3 percent from $1,949 last winter.

Tim Evans, an analyst at Citi Futures Perspective, said expectations of cold weather could also lend some support to futures, but adds the physical oil market so far remains unimpressed by the cold weather.

January heating oil futures, a proxy for wholesale prices, stood at about $1.9238 per gallon Tuesday, well below last year’s peak over $4 per gallon.

Evans said the January heating oil crack spread, the profit from turning crude oil into heat oil, finished at $10.63 a barrel, or up $0.35, Monday. By Tuesday, the crack held above $10, way up from as low as $3 in early September.

“Market talk had it that cold temperatures were supporting the market, but while that seemed to be the case in the paper market for heating oil futures we note that the physical market seemed less impressed,” he said in a report.

Late Monday, the New York Harbor market heat oil was quoted at 2.75-3.00 cents below the January futures benchmark, “hardly evidence of a spike in heating demand,” Evans added.

Editing by Christian Wiessner