Wednesday, February 11, 2009

A Comment on this weeks TWIP

As I noted last week, today is the weekly review of petroleum from the "This Week in Petroleum" (TWIP) at the EIA. There is not a lot that is of special concern this week. As I noted in my post yesterday, we are at the point where demand should start to kick up a little as we go from the relatively quiet period at the start of the year into the ramp up to the summer driving season. Normally we would also be starting to see a little easing off in the weather, with warmer days reducing the demands for heating. (And in that regard it has rained so much that it is hard to wade over to the wood pile for logs, and so the current warm spell is appreciated).

The EIA comments on the data are focused more on the heating oil aspect of the situation, explaining why the cold spell has not been reflected in a change in retail prices.
Two factors may offer an explanation for the smaller decline in retail heating prices. The first is the relative strength of the global distillate market. Distillate fuel includes both heating oil and diesel. In the United States, heating oil makes up a relatively small portion of the domestic distillate market while diesel fuel makes up most of the remainder. This is true for much of the rest of the world. Until fairly recently, distillate prices have shown surprising strength compared to other petroleum products due to strong global demand for distillate. As a result, distillate prices did not fall as much as crude oil prices.

The second factor may be related to events of the past summer. The summer is when heating oil customers are typically offered contracts to lock-in prices for the upcoming winter. The price for residential heating oil reached its historic peak last July, averaging $4.53 per gallon. Some heating oil customers may have been anxious about those unusually high prices and wanted to shield themselves from possibly higher prices in the winter. When a customer locks in a contract with a heating oil company, the company often enters into a similar contract with a wholesaler, guaranteeing they will be able to supply that customer with enough heating oil for the winter at a stable price. (This type of commitment is even required by law in Connecticut.) Moreover, many heating oil companies buy some of their heating oil in the off-season to ensure an adequate supply for the winter, regardless of any pre-arrangement with their customers. So another reason heating oil prices this winter have not fallen as quickly as crude may be that some of the volume heating oil dealers (and customers) bought earlier was quite expensive. Thus, a portion of this additional expense may have been passed on to the customer during this heating season.

A clear bottom seems to be developing for crude prices both in the spot price
And contract markets

(Source EIA)

But with domestic production rising above last year, and imports remaining at last years level, domestic stocks continue to rise. In January the Strategic Petroleum Reserve added another 0.7 million barrels as part of the Royalty in Kind program (RIK), though some of these stocks may be exchanged later in the year . There was, however, a slight downtick in the amount going to refineries. Over on the gasoline page this resulted in a drop in gasoline produced, relative to last year, even though demand was seen as having returned to last years level. Imports remain below last year, though they are climbing, and the combination led to a reduction in the gas in storage, though it has returned to near the middle of the five-year range. This may well, in part, be what is reflected in the pickup in gasoline prices.

Looking at the distillate plots, demand is still below last year, though sneaking upwards, while production is still a little ahead of last year. The net result is that stocks remain above the 5-year average, which may be in part why (as the quote above notes) prices have remained relatively stable.

(Source EIA)

It will take a little while to see if the normal changes in demand still occur this year.


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