A storm brews in heating oil
The US and Europe are running out of time to refill storage tanks
Heating oil is not what naturally comes to mind in the middle of August — particularly during a heat wave in Europe. Moreover, the market appears calm on the surface, with prices down 30% since March.
Dig a bit deeper, though, and there's a storm brewing.
America and Europe ordinarily use the low-demand seasons of spring and summer to rebuild their stocks of middle distillates — heating oil and diesel — for use during the winter. So far, they have largely failed to do so.
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In the US, middle-distillate inventories typically increase by 20 million barrels from mid-April to mid-September. However, stocks are up by only 2 million barrels this time as refiners concentrate on making gasoline and overseas demand drains local stocks. In Europe, the situation is similar.
The US East Coast is of particular concern. The region is home to New York Harbor, the pricing point for US heating oil. It's also where the demand is: of the roughly 5.3 million households that use heating oil in America, more than 80% are in the Northeast. On a seasonal level, East Coast middle-distillate inventories are the lowest since at least 1992.
Typically, stocks start falling there by mid-September, and soon after in the rest of America and Europe, suggesting the industry has all but run out of time to rebuild the buffer.
High prices will be needed to force demand down and avoid running out of supply. But even high prices may not dent consumption enough because German industrial companies are switching from gas to oil, using more heating oil and diesel for electricity and steam production.
Ironically, Europe is for now relying on Russian diesel to fill the gap, with imports in June and July rebounding to prewar levels. Starting in February, however, Europe won't be allowed to import Russian diesel as sanctions over the Ukraine invasion take effect. By then, the heating oil market may feel as hot as the weather does now.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of "The World for Sale: Money, Power and the Traders Who Barter the Earth's Resources." @JavierBlas
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
