Heating oil is a distillate but so is jet fuel, bunker fuel for ships, on road diesel etc. They all have different specs. Heating oil, used to heat homes falls into the dirty end of the spectrum or > 500 ppm sulfur. Production of high sulfur distillate has been falling like a rock since the EPA mandated an increase in ULS (ultra low sulfur) last summer.
This morning I spoke with the EIA to make sure I wasn't off my nut and they confirmed that high sulfur stocks were indeed down by close to a third relative to year ago levels. As a majority of this is burned to heat homes and the other high sulfur uses (which were replaced with ULS) did not account for this much of the total I'm thinking supplies of high sulfur distillate are going to be tight this year. When I pointed out how far below average we are the EIa representative seemed at a loss for words and said he was forwarding the point along to the STEO (short term energy outlook) team who is about a month away from producing their next look at the 2007/2008 winter outlook. He said it was true that people could burn ULS in their home boilers but that the cost would be "very high".
Excellent insight Z. New subscriber here and very pleased with your ability to discern these things for us. It would seem to me to be very symptomatic of the fixed refining capacity right now – a zero sum game. Make more ULS diesel for highways, it comes out of Northern folks heating oil. Not realistic that heating oil homes can convert to NG fast enough this season…so they’ll have to burn the ULS, right? Hence…whats the corresponding stock play?
cheers-K
Morning Z – that move up last night looking somewhat spiky now.
Down to Opec now I guess although any reaction i expect will only be a short term one. I guess the Saudis may appease the rest by saying they will hike production but maybe delay it until December when they can again re-assess the situation.
Hey Nicky, there’s a Tuesday post out now.
Jury still out. Iraqi minister left early. Looks like its 3 for (SA, UAE, Kuwait)
They had that David Beuchtal on CNBC very early this morning who was saying that oil price spikes like this one have preceded all the last recessions in the US. Once it kicks in he says he expects oil to trade back towards $20 – $30 – normal for the cycle.