It' s supposed to reach nearly 70 degrees this coming week in New Jersey, but the other day when the temperature inside our house dipped to around 63 degrees and our heat came on I knew that this week's forecast was just a big tease. You can't stop the cold from coming, but high distillate inventories could provide some price relief this winter for those of us with oil heat.
Current U.S. stocks of distillates, which include heating oil, diesel and jet fuel, are unusually high, according to the Energy Information Administration. That's because as the economy weakened, demand for distillates declined more quickly than supply. The Energy Department says U.S. distillate inventories are the highest 1983! What happened?
Well, as weak retail markets reduced truck, rail and bus traffic, diesel demand slumped. Less air travel cut diesel consumption too. Gasoline inventories also rose, but not as much as diesel.
The domestic distillate market was not the only problem. Exports slumped too. Refiners can shift their operations to make a higher ratio of gasoline to distillate or to make a higher ratio of distillate to gasoline. Last year, most U.S. refiners opted to make more distillate because they had high hopes for the export market, particularly China.
There was so much demand from China earlier last year, as their economy thrived and as they prepared for the Olympic games that it bid up distillate prices around the world. But after the 2008 Olympics, the world economy slowed down, China's demand weakened, and U.S. refiners went from tight supply and higher prices to plentiful supply and weaker prices. The average price for U.S. diesel fuel at the end of September was $2.60 per gallon, down from $3.96 per gallon in September 2008.
So, what's in store for us this winter? Weather forecasters disagree on temperature trends, with some saying this could be the coldest winter in a decade because of a weaker warm current in the Pacific (El Nino), and others saying that it could be warmer than last year because of less snow cover in Siberia.
Whatever the temperature, many homes will need heat, and many homeowners will have to buy oil. Hopefully, in this tough economy, we'll be the beneficiaries of weaker diesel demand, higher distillate inventories and softer heating oil prices.
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