Oil crisis in the United States

Heating oil, diesel and gasoline make a toxic mix

SAN FRANCISCO (MarketWatch)  

Oil prices back above $100 a barrel, rising U.S. exports and falling stocks of distillates, and growing demand for both heating oil and diesel may prove to be a toxic mix for energy consumers this winter.

Crude is now back over $100, “so those input costs to refiners are going to roll down hill to consumers who are already strapped with high costs and debt,” said Kevin Kerr, co-editor of Global Resource Hunter, a trading newsletter at Weiss Research.

The price of crude oil futures on the NYMEX have rallied to a 5-month high with the price of a barrel of West Texas Intermediate crude up at about $102 Wednesday. Should this concern investors?

“Heating oil supplies have been ample so far, but the cold weather is just starting to set in, and a long, protracted winter could turn this into a very expensive season for consumers,” he said.

Prices for West Texas Intermediate (WTI) crude oil CL1Z -1.39%  closed above $102 a barrel Wednesday on the New York Mercantile Exchange as traders cheered news about a pipeline that’s expected to alleviate a supply glut at the oil’s delivery point. 

The glut of oil at Cushing, Okla., has pressured WTI prices, prompting them to trade at a more than $25-a-barrel discount, at one point, to Brent crude, Europe’s benchmark, said Alan Herbst, a principal at Utilis Advisory Group, and by removing the bottleneck, the spread between WTI and Brent will likely continue to narrow.

But “stronger WTI prices will result in higher refined product costs,” he said.

Chain reaction

That might end up hitting consumers in more ways than one — in the form of higher prices for gasoline as well as heating oil and diesel.

“If crude oil remains above $100 a barrel, prices at the [gasoline] pump will move closer to $4 per gallon,” said Herbst.

Meanwhile, U.S. households in the Northeast mostly use heating oil as a heating fuel during the winter months and the average household may spend 10% more this winter for heating oil, 

according to an Energy Information Administration forecast.

Farmers also use diesel to power their equipment for harvesting crops, which is currently underway.

And with higher demand for those products, refiners may choose to shift more output away from gasoline toward making heating oil and diesel, both of which are classified as distillates.

“Refineries need to adjust their production schedules to build inventories of heating oil in order to meet winter demand,” said Jeffery Born, a professor at the College of Business Administration at Northeastern University in Boston. “This usually means cutting back gasoline production.”

“By now, we should be starting into the heating season and refineries should be drawing down on gasoline stocks for the Thanksgiving and Christmas holidays and moving into production of heating oil,” said Born, but “it feels like September [and] if we are still driving like September, this could be putting upward pressure on gasoline prices.”

A gallon of regular gasoline at the pump cost $3.39 on average Thursday, according to AAA’s Daily Fuel Gauge Report. That’s down around 8 cents from a month ago, but still up 50 cents from a year ago

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