Heating Oil
From IntFX
Contents |
[edit] Overview
Heating oil is a petroleum product used by many Americans to heat their homes. Historically,heating oil prices have fluctuated from year to year and month to month, generally being higher during the winter months when demand is higher. [1]
Heating Oil, also known as No. 2 fuel oil, accounts for about 25% of the yield of a barrel of crude, the second largest "cut" after gasoline. In its early years, the heating oil futures contract attracted mainly heating oil wholesalers and large consumers. It soon became apparent that the contract was also being used to hedge diesel fuel, which is chemically similar to heating oil, and jet fuel, which trades in the cash market at a usually stable premium to NYMEX Division heating oil futures.
Today, a wide variety of businesses, including oil refiners, wholesale marketers, heating oil retailers, trucking companies, airlines, and marine transport operators, as well as other major consumers of fuel oil, have embraced this contract as a risk management vehicle and pricing mechanism. The recent imposition of strict federal sulfur standards for diesel fuel have the potential to increase price volatility in some markets.Seasonal aspecs of supply and demand are already factored into the futures prices and these prices do not move in tandem with the respective cash market. Additionally, the option premiums do not move in tandem with the underlying futures contracts. Seasonal and economic factors influence the relative prices of heating oil, gasoline, natural gas, propane, and crude oil.[2]
[edit] Heating Oil Prices
Trading Unit- 42,000 U.S. gallons (1,000 barrels).
Price Quotation- U.S. dollars and cents per gallon.
Trading Months is Trading is conducted in 18 consecutive months commencing with the next calendar month (for example, on January 6, 2004, trading occurs in all months from February 2004 through July 2005).
Minimum Price Fluctuation is $0.0001 (0.01¢) per gallon ($4.20 per contract). Maximum Daily Price Fluctuation is $0.25 per gallon ($10,500 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $0.25 per gallon in either direction. If another halt were triggered, the market would continue to be expanded by $0.25 per gallon in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session.Trading Symbol is HO.[3]
[edit] Supply/Demand
Heating oil prices will almost certainly be higher this year than last. The EIA in its recent winter outlook projected that heating oil costs for U.S. northeast consumers will average 22 percent higher than last year. Based on a $80/barrel forecast, residential heating oil prices in Canada would average about $0.95/litre - about 15 cents more per litre than in 2006/07. There are risks to this outlook, however, as follows: Crude oil prices: Heating oil prices will closely track movements in the oil market. Crude oil is expected to average about US$80 per barrel this winter. If prices average more than $80 per barrel, this would tend to put upward pressure on heating oil prices. Lower crude oil prices would tend to have the opposite effect.
U.S. inventories: As discussed, heating oil inventories in the U.S. are currently around the five-year average. While these levels are considered to be adequate to meet demand this winter, stocks are considerably lower than last year. When inventories build, prices tend to move lower, when inventories draw down, prices tend to rise. Of course, any refinery disruptions in the U.S. or in Canada would constrain heating oil supply and put upward pressure on prices.
Demand: Demand for heating oil is highest during the winter - as a result, prices are typically higher. Heating oil demand is directly linked to weather. A warmer-than-usual winter would reduce demand and could move prices lower. On the other hand, an unusually cold winter, or an early start to winter, would increase demand, reduce inventories, and could force prices higher. Many forecasters are predicting a warmer-than-average winter.
Overall: Heating oil prices in Canada are expected to be higher this winter than last - averaging in the area of $.095 per litre.
[edit] Reason of heating oil prices fluctuation
1.Heating oil prices paid by consumers can vary over time and by where a consumer lives. Prices can change for a variety of reasons. These include:
2.Seasonality in the demand for heating oil - When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is highest. However, at times, prices can surge quickly to very high levels, as occurred in January/February 2000 (see box on “What Causes a Surge in Heating Oil Prices”). A homeowner in the Northeast might use 650-1000 gallons of heating oil during a typical winter, while consuming very little during the rest of the year.
3.Changes in the cost of crude oil - Since crude oil is a major price component of heating oil, changes in the price of crude oil will generally affect the price of heating oil. (See Figure 2.) Crude oil prices are determined by worldwide supply and demand. Demand can vary worldwide with the economy and with weather. Supply can be influenced by the Organization of Petroleum Exporting Countries (OPEC) and other factors.
4.Competition in local markets – Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors. Consumers in remote or rural locations may face higher prices because there are fewer competitors.
5.Regional operating costs - Prices also are impacted by higher costs of transporting the product to remote locations. In addition, the cost of doing business by dealers can vary substantially de pending on the area of the country in which the dealer is located. Costs of doing business include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and local fees.[4]
[edit] Global Petroleum
The combination of rising consumption, further downward revisions in the supply outlook for countries outside of the Organization of the Petroleum Exporting Countries (OPEC), and low surplus production capacity reinforce the perception that supply is having a difficult time keeping up with demand growth, accounting for much of the upward trend in oil prices. Consumption in countries outside of the Organization for Economic Cooperation and Development (OECD) continues to grow rapidly, offsetting weaker consumption in OECD countries, especially the United States. Declining production in a number of non-OPEC nations, including Mexico, United Kingdom, and Norway, is largely offsetting increases in other countries. Slow growth in non-OPEC supply is coinciding with disruptions in supplies from some OPEC countries, such as Nigeria. Ongoing geopolitical concerns in several producing countries, including Venezuela and Iran, have contributed to oil price volatility. The market remains concerned that the cushion of surplus production capacity of less than 2 million bbl/d (almost all located in Saudi Arabia) and/or stocks is insufficient to protect against possible changes in supply or consumption, especially as we enter the summer hurricane season. The absence of a Saudi commitment to add capacity beyond its current goal of 12.5 million bbl/d adds to the uncertainty about the adequacy of future supply capacity growth.
[edit] Consumption
Preliminary data indicate global oil consumption rose by about 630,000 bbl/d during the first quarter of 2008 compared with year-earlier levels, much lower than the 1.0-million-bbl/d growth expected in the previous Outlook. Most of this downward revision occurred in the OECD countries. With this revision, OECD consumption during the first quarter is estimated to have fallen by 460,000 bbl/d from year-earlier levels, with the declines concentrated in the United States. Consumption in the other OECD regions was flat during the first quarter, with European consumption increasing relative to year-earlier levels only because warmer-than-normal weather led to unseasonably low consumption in first quarter of 2007. OECD consumption is projected to decrease by 240,000 bbl/d in 2008 and increase slightly in 2009.
In contrast, consumption in the non-OECD countries is projected to grow by 1.2 million bbl/d in 2008, led by China, India, and the Middle East (World Oil Consumption). Continued economic growth, fuel subsidies, and increased oil-fired power generation are supporting increases in non-OECD oil consumption. Efforts to ease subsidies in some non-OECD Asian nations such as India and Indonesia could eventually lead to higher prices in those countries and lower overall non-OECD consumption growth. However, China represents the single largest source of world oil consumption growth in our forecast, and that country has not yet begun to remove price subsidies.
[edit] Non-OPEC Supply
Non-OPEC supply growth remains weak despite 6 years of rising prices. Non-OPEC production is expected to rise by 310,000 bbl/d in 2008, down sharply from last month's Outlook. Actual production data from Russia, Norway, and Mexico, along with lowered expectations for Brazil, are the principal reasons for the downward revision. Non-OPEC supply during the first quarter of the year was 240,000 bbl/d lower than the first quarter of 2007, and the second quarter of 2008 is expected to be 200,000 bbl/d lower than last year. As a result, virtually all of the growth in non-OPEC supply is expected in the second half of the year, with an expected year-over-year increase of 820,000 bbl/d, driven by growth in Brazil and Azerbaijan (Non-OPEC Oil Production Growth). EIA has also revised its estimates of non-OPEC supply growth downwards in 2009 to 1.1 million bbl/d, slightly below expected consumption growth for the year. Given recent history, EIA believes that the pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects and accelerating production declines in some older fields. As a result, net production gains could be less than the current forecast, leading to a higher price path.
[edit] OPEC Supply
OPEC crude oil production is projected to average 36.9 million bbl/d in the second quarter, 140,000 bbl/d higher than first quarter levels. Over the quarter, lower production in Nigeria, due to security problems and a workers strike, was offset by higher Iraqi and Saudi production. Saudi Arabia reportedly increased output in mid-May by 300,000 bbl/d, with production expected to reach 9.4 million bbl/d in June. At these production levels, global surplus production capacity, virtually all of which is in Saudi Arabia, should be about 1.4 million bbl/d in June (OPEC Surplus Oil Production Capacity). OPEC crude oil production is expected to increase during the third quarter of 2008, although this is dependent upon how the security situation in Iraq and Nigeria evolves. Iraq plans to raise exports from the north by about 100,000 bbl/d in June if security conditions permit.
[edit] Inventories
OECD commercial inventories fell in the first quarter of 2008 by about 430,000 bbl/d, in line with the 5-year average decline during that part of the year. At the end of the first quarter, OECD commercial inventories stood at 2.54 billion barrels, 18 million barrels above the 5-year average and equal to 53 days of forward consumption. However, OECD stock additions during the second quarter are projected to be far below the average 5-year build, with OECD commercial inventories staying at or below their 5-year average for the remainder of the year (Days of Supply of OECD Commercial Stocks).
[edit] U.S. Petroleum
[edit] Production.
In 2008, total domestic crude oil output is projected to average 5.1 million bbl/d, the same as in 2006 and 2007 (U.S. Crude Oil Production). Production growth in the lower-48 and Federal Gulf of Mexico regions is expected to offset declines in Alaskan production. In 2009, total production is projected to average 5.3 million bbl/d, up 210,000 bbl/d from 2008. Federal Gulf of Mexico output is expected to rise 270,000 bbl/d due mostly to the Thunder Horse platform coming on-stream in late 2008 and the Tahiti platform beginning production in 2009, but declines are projected for Alaska and the lower-48 States. This projection includes an estimated expectation of hurricane-induced outage of about 11 million barrels for the offshore region in 2008 (see Hurricane Outlook). Fuel ethanol production is projected to increase from an annual average of 420,000 bbl/d in 2007, to 580,000 bbl/d in 2008 and 640,000 bbl/d in 2009.
[edit] Consumption
Total petroleum consumption of liquid fuels and other petroleum products averaged 20.7 million bbl/d in 2007, similar to 2006 (U.S. Petroleum Products Consumption Growth). Based on prospects for a weak economy and record high crude oil and product prices extending into next year, consumption is projected to shrink by 290,000 bbl/d in 2008, a sharper drop than the nearly 200,000 bbl/d projected in the previous Outlook. In 2009, total consumption is projected to rise by 140,000 bbl/d, somewhat less than the nearly 200,000 bbl/d increase projected in the previous Outlook.
Prices. WTI crude oil prices, which averaged $72 per barrel in 2007 (Crude Oil Prices), are projected to average $122 per barrel in 2008, up about $12 per barrel from the projection in last month’s Outlook; and $126 per barrel in 2009, up more than $20 per barrel from the previous Outlook.
EIA projects that regular-grade motor gasoline retail prices, which averaged $2.81 per gallon in 2007, will average $3.78 per gallon this year, up more than 25 cents from last month’s Outlook. Gasoline prices are expected to continue to rise from $3.98 per gallon on June 2 to a monthly average price peak of $4.15 per gallon in August. This forecast reflects a sizable narrowing of refiner gasoline margins from those of last year because of weakness in gasoline demand and growth in ethanol supply. In 2009, regular-grade gasoline retail prices are projected to average $3.92 per gallon, 48 cents higher than projected in the previous Outlook.
Diesel fuel retail prices in 2008 and 2009 are projected to average $4.32 per gallon, up from $2.88 per gallon last year. This reflects strength in diesel demand, particularly in emerging markets, that has significantly increased the margins between diesel prices and crude oil costs from those of last year. Diesel fuel prices are projected to remain near the June 2 price of $4.71 per gallon over the next few months as refiner margins begin to weaken slightly, offsetting the projected rise in crude oil costs.[5]
Eurofuel's members cover the complete home heating supply chain, from oil companies of various sizes, through to independent fuel traders and distributors, heating equipment manufacturers and finally heating installers. The great majority of these members are Small and Medium Enterprises (SMEs), key in boosting economic growth and employment throughout the EU.
[edit] Some facts on heating oil
1.The annual consumption of heating oil is about one-fifth of total EU energy consumption for domestic heating and hot water purposes
2.The European oil heating industry has an annual retail price turnover of around 50 billion Euros for oil, and some 2.5 billion Euros for equipment.
3. Heating oil ensures consumer choice, as the heating oil industry operates in an open and competitive market, governed by competitive suppliers.
4.Through its network independence, heating oil provides individual security stocks via each household's oil storage tank.
The annual consumption of heating oil is about one-fifth of total EU energy consumption for domestic heating and hot water purposes
