"Distillate fuel inventories, which include both diesel fuel and heating oil, have declined for five weeks in a row, while heating oil inventories alone have dropped in four out of the last five weeks," the U.S. Energy Information Administration noted in its weekly market analysis. "Should this trend continue, it would imply an earlier pre-winter (supply) peak than normally seen and would mean that inventories appear increasingly likely to enter the peak (demand) winter season at low levels."
The reason for the decline in heating-oil production was not clear Wednesday, although the EIA noted that the amount of crude production by U.S. refineries increased by 280,000 barrels per day to nearly 14.8 million bpd.
The input increase appeared to be behind increases in the production of gasoline and the lower-sulfur distillates such as jet and diesel.
One motivator was likely the high price gasoline and diesel continue to fetch. The EIA noted that the nationwide average price for a gallon of regular unleaded went up 4.2 cents last week to $2.035 per gallon, some 46 cents over last fall. Diesel was up 8.8 cents to $2.18 per gallon.
Because diesel and heating oil are very similar products, making more diesel often means sacrificing heating-oil production, which appears to be resulting in higher prices for both.
"Retail diesel prices are reflecting not only the rise in crude oil prices, but also pressure from strong demand and high spot prices for heating oil," the EIA said. "Prices were up throughout the country, with the Midwest seeing the largest increase of 10.6 cents to reach $2.161 per gallon."
The supply news from the EIA as well as a separate but similar survey released Wednesday by the American Petroleum Institute were enough to snap the market out of the bearish mood it had been all week and send futures prices back on the road to the upside.
November heating oil, in fact, climbed to a record high of $1.5604 per gallon on the New York Mercantile Exchange, a little over 5 cents above Tuesday's close. December settled at $1.5613 per gallon. November NYMEX gasoline climbed 4.6 cents to $1.4032 per gallon.
The NYMEX crude market was also significantly higher, jumping by a strong $1.63 to $54.93 per barrel. December, which became the front month contract at Wednesday's close, soared $1.77 to $54.41 per barrel.
The market had been in a slump this week due to new warnings from OPEC and from the world financial community that oil prices had reached a point where they were expensive enough to act as a significant drag on the world economy. Since energy demand generally falls during economic downturns, traders took the opportunity to shed a share of the length they had built up, particularly in the gasoline market.
However, heating oil continued to hold sway as the eastern United States finds itself facing a predicted colder-than-normal winter in the Mid-Atlantic states, and residential heating-oil prices at a record average of $1.988 per gallon, 8 cents higher than the previous week and more than 60 cents over last fall's levels.
The lucrative prices, however, may not be high enough to lure heating-oil imports from European refiners since Europe and Japan face similar tight supplies and their own high-prices wholesale markets.
The wind-down of the harvest season, which consumes a lot of diesel fuel, coupled with moderate temperatures would likely hold down heating-oil demand long enough to allow supplies to rebuild; however, it would probably take quite a warm spell to cause prices paid by beleaguered homeowners to back too far away from the dizzying $2-per-gallon level.
Copyright 2004 by United Press International
