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By Robert Rapier on Oct 3, 2007 with no responses

This Week in Petroleum 10-3-07

I almost never talk about distillates, which are hydrocarbons that are heavier than gasoline and are used to make diesel and heating oil. I don’t use heating oil or diesel, so I don’t think about this market too much, but I know that a lot of people do. And for those who do, it’s shaping up to be at a minimum an expensive winter. I had seen this story earlier in the week:

Heating oil prices soar, elderly panic

A warm, summer-like day did nothing to ease the fears of the elderly women who walked into the Brockton senior center earlier this week seeking fuel assistance.

“They are panicking,” said Anne McCormack, the city’s director of elderly affairs.

And, they have reason to panic, say fuel oil dealers who are paying record-high prices and therefore charging record-high prices even before the winter cold sets in. The problem is even worse for those who rely on government fuel assistance programs, administrators say.

“Never in my lifetime,” veteran oil dealer Charlie Dyer of Raynham said about today’s prices. “It’s going to be a very difficult winter for customers, no doubt about it.”

And consumers will get no relief, as today the EIA announced a very large surprise drop in distillate inventories:

Oil rebounds to go above $80

In its weekly inventory report, the Energy Information Administration (EIA) said crude stocks gained by 1.2 million barrels last week. Analysts were looking for a decline of 400,000 barrels according to Dow Jones.

Gas inventories eased by 100,000 barrels, compared to the 400,000 gain predicted by analysts. Distillates, used to make heating oil and diesel fuel, fell by 1.2 million barrels. Analysts were looking for an increase of 700,000 barrels in distillate supplies.

In the inventory report, EIA said refineries operated at 87.5 percent capacity, falling just shy of expectations.

Some analysts predict crude is set to drop $10 to $15 a barrel over the next couple of months as the fundamentals aren’t there to support $80 oil. Others say $100 a barrel is just around the corner, especially in the event of a surprise disruption in supplies.

So, here’s the score heading into the 4th quarter: Gasoline inventories remain at record-low levels. Distillate inventories, at 134 million barrels, are 16 million barrels lower than at this time last year (but not terribly low by historical standards). But distillate prices are $0.65/gallon higher than they were a year ago, meaning fuel oil bills are going to be much higher than normal. Crude oil inventories have fallen over the past couple of months, but are still historically high. I think the big story remains gasoline, and whether we can dig our way out of this hole over the fall and winter. If not, something’s got to give next spring.