One Cold Blast Might Wipe Out Homeowners' Heating Oil Stash

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10/23 16:06 One Cold Blast Might Wipe Out Homeowners' Heating Oil Stash By Stephen Voss

New York, Oct. 23 (Bloomberg) -- This month's drop in U.S. heating oil supplies at a time of surging refinery production has left industry executives, government officials and economists wondering where all that fuel is going. It may not matter.

Whether supplies moved overseas, as some traders speculate, or into homeowners' basements, as the U.S. Energy Department theorizes, distributors are united in one conclusion: The U.S. Northeast is just one cold snap away from soaring prices.

``Most customers have 275-gallon tanks and as a practical matter, you never let it run down below 75 gallons,'' said Paul Vermylen, president of Meenan Oil Co. LP in Syosset, New York, which has 120,000 customers. So chances are, ``you'll have to fill it five times,'' mostly during the winter months, he said.

Even if homeowners don't have to fill up that much, demand for scarce supplies is expected to rise this winter, which forecasters say will be colder in the Northeast than it has been the previous three years. The government has warned consumers to expect high winter heating bills.

The average household that uses heating oil can expect to burn 693 gallons of the fuel this winter at a cost of $949, up 25 percent from the $760 they spent on an average 644 gallons last winter, the Energy Department said.

The forecast was based on an average winter retail price for heating oil of $1.37 a gallon, though current prices have already topped $1.50 in Massachusetts and $1.65 in New York.

Vermylen said his 250-truck delivery team won't have any problem getting supplies to his customers this winter, ``but it's going to be expensive.''

Record Output

That's because supplies are tight. The American Petroleum Institute said refinery inventories of distillate fuels -- including heating oil and diesel -- are down 22 percent from a year ago at 112.7 million barrels. The same industry group said last week that production of the fuel surged to an all-time record in September.

The Energy Department and the Federal Reserve say much of the missing heating oil has already moved downstream, out of refinery control.

``The remarkable surge in shipments of home heating oil, both here and in Europe, suggests very heavy precautionary oil accumulation by dealers and households, not covered in the usual data on inventories for the industry,'' Fed Chairman Alan Greenspan said last week.

Local retailers and homeowners may have stocked up earlier than usual to avoid the shortages and surging prices that occurred during a brief bout of frigid weather in the Northeast last winter.

One of the reminders from that period was that heating oil gets burned rapidly when the thermometer is stuck below freezing. Retail prices surged to record levels above $2 a gallon in early February as ice formed along waterways in the region, keeping barges from making normal deliveries to local suppliers.

Low Measurable Supplies

``A two-week cold snap in December could turn things around pretty quick,'' said Bill Vitro, a trader at Castle Oil Corp., a heating oil wholesaler and retailer in Harrison, New York.

Heating oil supplies held by refiners and big oil companies, the kind measured by the API and the U.S. Energy Department, are down 52 percent from a year ago along the East Coast, the fuel's biggest market, according to the industry-funded API.

``Even if everybody was full, at best, it's a short-term fix taking us up to the middle of November,'' said Kevin Rooney, chief executive of the Oil Heat Institute of Long Island. Rooney, whose group represents about 100 retailers, doubts that early stockpiling occurred. ``When did all these tanks get filled?'' he asked.

Too Costly to Hold

Wholesalers haven't built up supplies because prices are cheaper for delivery later this year, and cheaper still early next year, said Philip Wechter, head trader at fuel wholesaler R.A.D. Energy Corp. in Purchase, New York, whose customers include the New York City Transit Authority.

Heating oil for November delivery on the New York Mercantile Exchange, representing wholesale prices, touched $1.11 a gallon in New York Oct. 12, the highest price since 1979, and was recently 99.9 cents a gallon. Fuel for February delivery went for 96.4 cents.

``Who can afford to carry inventories at these levels?'' Wechter said.

Calls From Consumers

In Massachusetts, there has been a 50 percent increase in calls this year from consumers asking about buying heating oil at fixed or capped prices, said Michael Ferrante, president of the Massachusetts Oil Heat Council, which represents 350 marketers.

Even so, while pre-winter buying is higher than normal, ``it's not a considerable uptick in activity,'' Ferrante said. ``In reality, it's still only October, so you are still going to need additional fuel later this winter.''

The Department of Energy was busy encouraging refiners to produce more gasoline from every barrel of crude oil they processed in June, when the pump price for a gallon of regular peaked at a record $1.68 nationwide and rose above $2 in the Midwest.

With crude oil prices still high at close to $34 a barrel, almost triple what they were at the start of 1999, the department is switching its focus, warning consumers about prospects for high heating oil, natural gas and electricity bills.

The government's forecast that there will be an increase not just in price but also in the amount of fuel to be burned is a testament to expectations that this winter -- deemed ``normal'' by the National Weather Service -- will be colder than last winter, which was the mildest on record nationwide.

The DOE is releasing 30 million barrels of government crude oil to help refiners make heating oil, and has established a 2 million-barrel emergency heating oil reserve in the Northeast.

All that may not help if it gets unusually cold, analysts said.

``We won't find out till the first cold weather comes whether low inventories are enough,'' said Marshall Thomas, senior vice president of PVM Oil Consultants, an affiliate of oil brokers PVM Oil Associates, in Teaneck, New Jersey.

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-- Martin Thompson (mthom1927@aol.com), October 24, 2000


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