World consumers may have to cough up more cash to cover heating bills this winter, but there will be no shortage of fuel to fire up their boilers.
That offers cold comfort to investors who see potential supply crunches created by a massive loss of oil products when Hurricanes Rita and Katrina ripped through the U.S. Gulf.
“There is potential for squeezes and prices to go up,” said Mark Mathias of investment fund Dawnay Day Quantum. “But people won’t be left freezing and unable to heat their homes.”
The loss of up to 175 million barrels of oil products will raise the risk of a steeper-than-normal drop in U.S. stocks heading into winter. High natural gas prices and the possibility of severe weather strengthen the prospect of a rough ride.
“It all points to strong prices,” said Michael Wittner, global head of energy market research at Calyon Corporate and Investment Bank, part of Credit Agricole Group.
“Demand for heating oil is pretty inelastic. People have to heat their homes. The question is, ’At what price?”’
Heating oil in the United States, the world’s biggest energy burner, is already expensive enough at around $2 a gallon to activate a trigger giving Washington the option to tap its two-million-barrel Northeast heating oil reserve.
But the reserves, if drained, may provide little warmth.
“The U.S. uses over one million bpd of heating oil, so this reserve is not much of a cushion and will do little to control price spikes if shortages occur,” said consultancy PFC Energy.
Weather risk
Global stockpiles of heating oil are now at comfortable levels, analysts say. Refiners have been maximizing output of heating oil and diesel, primary drivers of demand growth for the past two years.
That might help soften the hurricanes’ blow.
Geoff Pyne of ABN AMRO Commodity Derivatives reckons U.S. distillate production during the fourth quarter will only run five to 10 million barrels below last year, while gasoline output could be up to 50 million barrels lower.
“With distillate yields so much higher than last year and stocks in Europe plentiful, the main risk is cold weather combined with continued high natural gas prices,” said Pyne.
Analysts are in broad agreement that winter temperatures will be more crucial than ever in determining prices because of tight oil and gas supplies due to hurricane damage in the Gulf of Mexico.
But the National Oceanic and Atmospheric Administration said it could not predict if the key heating regions -- the U.S. Midwest and Northeast -- would have colder, warmer or average temperatures in December, January and February.
Whatever the weather, the International Energy Agency sees world oil demand growth recovering during those months. The West’s energy watchdog cast doubt on the petroleum demand destruction, saying world oil markets had weathered the worst.
But the U.S. Energy Information Administration on Wednesday cut its estimate of global oil demand growth in the fourth quarter by 1.1 million barrels per day (bpd) to 900,000 bpd.
It also cut growth in the first quarter of next year by 300,000 bpd.
“That’s a massive amount of demand destruction,” said Deborah White of SG Commodities. “We could be in a very tricky position by the first quarter if the EIA is not right.”
