Northeastern US fuel marketers are wary of unseasonably low distillates supplies but say proposals to draw on strategic reserves could cause market instability.
Northeast US states — where as much as 18pc of homes use distillates as their primary heating fuel — have faced record-high heating oil prices this winter as increased distillates exports caused by the war in Ukraine depleted Atlantic coast inventories earlier in the year. November New England residential heating oil prices were up 67pc to $5.52/USG from the same month last year, according to Energy Information Administration (EIA) data.
High prices and the tight supplies prompted the President Joe Biden's administration this fall to consider banning exports of US refined products, including distillates, while some Connecticut wholesalers limited the amount of heating oil allocated to retailers when the distillates market was the tightest it has been in at least 32 years.
Milder-than-expected winter weather helped avert a supply crisis, and inventories are recovering — Atlantic coast stocks were up by 7.6pc to 32.4mn bl in the week ending 9 December, according to data released today, down by 25pc from a year earlier. But the White House has considered restocking and releasing fuel from the North East Home Heating Oil Reserve (NEHHOR), a 1mn bl revolving stockpile created more than two decades ago for emergencies. They have only been drawn on once, in the aftermath of the 2012 Hurricane Sandy when diesel was tapped to aid emergency response generators and vehicles.
The reserves are "not a market balancing mechanism," says Mark Romaine, chief operating officer of wholesale retail and fuel distributor Global Partners. The reserves are designed for emergencies, such as when severe winter storms disrupt electricity and fuel supplies, he says, a view shared by the Massachusetts Energy Marketers Association.
While estimates vary, there is also only one-to-two days supply in the NEHHOR according to Northeast fuel marketers. That is unlikely to alleviate any prolonged crisis in distillates markets caused by interrupted supply or a spike in demand due to cold weather, the groups say.
Some industry groups in the region support the idea of restocking the reserves and returning them to their original 2mn bl capacity. But restocking this winter would take distillates supplies off the market that could otherwise be used to meet demand — potentially diminishing supply and raising already elevated prices — says Chris Herb, president of the Connecticut Energy Marketers Association. The "government understands this and will find a more appropriate time to fill the reserve," Herb says.
Power plant concerns loom
While a milder-than-expected winter through mid-December and growth of US diesel stocks to multi-month highs have somewhat alleviated the distillates shortage, fuel marketers and distributors warn of another possible concern — distillate demand from electric power plants.
New England relies heavily on natural gas-fired power during the winter but its gas pipeline capacity is tapped most winters. A lengthy cold snap could lead to a disruption in gas flows, leading some plants to switch to their secondary fuel source — diesel. Groton Electric Light, a small public power utility in Massachusetts, warned customers last month of the high possibility of rolling blackouts this winter if there is an extended cold spell, noting that in January 2022, 11pc of electricity generation in New England came from diesel, while some days as much as 25pc was diesel.
"Distillate suppliers are not in a position to meet the needs of the heating oil market and the electric generation markets," says Herb.
