HEATING OIL PRICES STILL COMBUSTIBLE, LINKED TO GAS

By Peter Rosenthal BridgeNews November 10, 2000 NEW YORK -- Rising production and inventories of heating oil have not taken the heat off the market, and traders say the front-month futures contract could set record high prices before the end of the year.

"If it's persistent and as cold as the forecasters say it will be, this market's going to be on tenterhooks at least until the end of December or January," said John Kilduff, senior vice president at FIMAT Futures. "Given the tight supplies, the market will nervously react."

New York Mercantile Exchange heating oil contracts for delivery in December have risen four straight days and peeped above $1 per gallon Thursday as the International Energy Agency and the U.S. Energy Information Administration reiterated their warnings about tight supplies this winter. Heating oil's gains this week have followed those of natural gas, the other primary heating fuel, and the fate of the two should remain linked all winter.

"A risk exists this winter for distillate fuel price spikes similar to what happened last February unless inventories build to sufficient levels by the end of the year," the EIA said Wednesday.

Heating oil and diesel fuel both are distillate fuels.

Heating oil inventories on the East Coast, where most of it is used in the winter, have risen 3.5 million barrels, or 17 percent, since the end of August. Storage of natural gas has increased 28 percent since that time, but is heading into the coldest months about 10 percent below what most analysts consider comfortable levels.

"Despite that fact, there's still concern about possible shortages," a broker said.

Inventories have increased as U.S. refineries run at record rates and OPEC continues to add supply. The cartel agreed last week to boost production by 500,000 barrels per day and therefore is not expected to make any further output decisions when it meets Sunday in Vienna.

But more crude oil from OPEC won't be enough this winter if refineries cannot keep their current pace or other problems develop in the supply chain. Most U.S. heating oil consumption is met by refinery output, not storage.

"As OPEC seeks to increase supply to calm the market, the world finds itself running up against physical constraints," the IEA, which monitors energy supplies for Western countries, said Thursday.

Any of those factors, especially a cold winter, could push heating oil back toward $1.111, the record reached Oct. 12.

"If it happens at the beginning of the winter, you probably have a good chance," said another broker

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-- Martin Thompson (mthom1927@aol.com), November 10, 2000