imaginima
By Hakan Kaya, PhD
With inventories of heating oil and diesel fuel touching 40-year lows, it could be an expensive winter for homeowners and truck drivers.
Winter is coming – and so, it appears, are higher heating bills.
An important output of U.S. oil refining is fuel distillates, such as diesel for trucks and trains, and fuel oil for heating homes. Distillate inventories often peak early in the year when production is high and economic activity is low, but tend to draw down into the summer. This year, they are way down: As of November 1, U.S. distillate inventories had fallen to 107 million barrels – their lowest November 1 level in 40 years, according to the Energy Information Administration (the rolling seven-year average is about 144 million barrels).
A series of unfortunate events has led us to this moment. First, underinvestment across the exploration and production (“E&P”) sectors was also prevalent in the refining sector. In the U.S., refining capacity is maxed out and no new refiners are coming online in the short run as the industry prioritizes cash-flow safety over growth based on investor guidance and political preferences. Second, Russian energy exports – the bulk of which are refined products – are drying up. Third, as natural gas prices continue to be sky-high, most utilities and factories in Europe and Asia have been switching from gas to oil, creating even more demand for distillates. High natural gas prices are also increasing refining costs.
Given the geopolitical landscape, there doesn’t appear to be a quick fix for this problem. Climate policies won’t be reversed and refineries cannot be built overnight. The only viable solution seems to be for prices to increase into the winter to kill demand and subsequently balance the market. Heating oil markets will likely heat up from here!
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