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Trader's Corner
This week’s Trader’s Corner looks at distillate inventory and import/export activity.
This week we are going to change pace and look at distillate/heating oil as we go into winter. Some of you may be in the heating oil business, and, perhaps if you aren’t, you may take solace in knowing that a rival energy source is in much the same situation as propane.
The two energy sources are in much the same situation inventory wise because both are experiencing increased exports and decreased imports. First, let’s look at inventories.
Not too long ago, if we were going to look at heating oil inventory, we would only look at the high-sulfur product, which was traditionally used for home heating. But, when refiners had to start taking out more sulfur in diesel, the changes made to processes also decreased the amount of high-sulfur (greater than 500 parts per million) heating oil that was produced.
Refiners now use lower-sulfur product to meet home heating demand. Below is a chart specifically on 500-ppm distillate (click to enlarge).
As the chart shows, the amount of high-sulfur heating oil inventory has been on a steady decline since the new sulfur specs went into effect. A lot of folks still watch these inventories, but we have not been concerned with them in the last few years.
Instead, we focus on total distillate inventories in trying to assess where heating oil suppliers and their customers may stand going into winter.
Granted, total distillate inventory includes product that is so low in sulfur as to likely never be used in home heating, but nevertheless total distillate inventory is a better gauge of supply than strictly the high-sulfur inventory. Total distillates include all distillates, including the high-sulfur product.
Total distillate inventory is improving and is slightly better than last year. However, inventory levels remain well below average and not far above five-year lows set last year. Like propane, the struggles to build inventory is directly related to import/export activity.
Last week the United States exported about 1.3 million barrels per day (bpd) and imported just 90,000 bpd. Exports had run below last year through the summer until about the middle of August. At that point, this new level of exports kicked in. During the span of these higher export rates, imports have also slipped to below last year’s volumes.
The good news is that inventories have continued to build during this stretch. While the current inventory levels aren’t comfortable, the trends of late suggest there is plenty of supply. Unfortunately it could take an increase in prices to back out exports, attract more imports and keep supplies at home.
Heating oil is already a high-priced energy option, so prospects of higher prices are never good for dealers and their customers. If we convert heating oil at today’s prices to an equivalent amount of propane, it is at 199 cents. In other words, 91,500 Btu of propane costs around 111 cents and 91,500 Btu of heating oil costs 199 cents.
If the government cuts back on renewable fuels standards, it could take away some of the benefits of exporting U.S. refined fuels. But that is unlikely to be a factor in the front half of this winter, if at all.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
Crude prices fell with less support from threats to supply in the Middle East. Propane surprisingly fell despite a 58,000-barrel draw in propane inventory. Conditions on Friday were bearish, but we go into the week neutral, primarily because of flat-to-falling U.S. propane inventory.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Over the weekend, the United States agreed to back a plan to have Syria turn over its chemical weapons. If Syria complies, the United States will not use military force to retaliate against Bashar al-Assad’s government. The news sent crude lower. The direction of crude prices was once again influencing propane’s price direction.
Tuesday: Propane suddenly showed a lot of weakness by outpacing crude lower. Investors were showing little interest in crude, with less worry about a United States military strike against Syria allowing prices to filter lower.
Wednesday: Propane and crude prices posted solid gains following supportive U.S. Energy Information Administration data. Propane inventory fell 58,000 barrels during the week reported. Meanwhile, the Federal Reserve surprised investors by not cutting back on its $85-billion-per-month bond-buying program used to stimulate U.S. economic activity.
Thursday: An increase in Libyan crude production helped prompt profit taking on Wednesday’s gains. Surprisingly the draw in propane inventory did not support propane prices as Conway matched the fall in crude and Belvieu outpaced crude lower.
Friday: The surprising weakness for propane prices continued to close out the week. Trading activity was light. West Texas Intermediate crude also continued lower, partly because Iran’s new president said earlier in the week that his country would never build a nuclear weapon. It followed that up by expressing hopes it could resolve issues between his country and western nations over Iran’s nuclear program. |
