Retailers Caught By High Heating Oil Prices,Slim Supply
By Stephen Parker
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Northeastern U.S. heating oil distributors have put
off stock-building and hedging in hopes that unusually high summer prices
would fall.
But with prices continuing to soar, analysts say some of those distributors
may have waited too long.
Now, those distributors will have to scramble for fuel in the market at a
time when a planned government heating oil reserve and new regulations
requiring companies to build stocks are producing greater competition for
scarce supplies.
"We have a real problem here, and we're deeply concerned," said Jack
Sullivan, chief executive of the New England Fuel Institute, a heating oil
trade association of 1,100 member companies. "Retailers are recognizing they
need to lock in a price. The market's not going to fall."
Heating oil futures on the New York Mercantile Exchange are up about 30% in
August alone and surged to a new post-Gulf War high Monday of $1.00 a
gallon.
Supply concerns have fueled the rally. U.S. heating oil stockpiles last week
totaled 42.8 million barrels, down about 40%, from a year ago, according to
the U.S. Department of Energy's Energy Information Administration.
Local fuel suppliers who haven't hedged their own costs for heating oil
supplies could see huge losses if prices continue to climb, said Thomas
Blakeslee, analyst at Energy Merchant in Wilton, Conn.
Retailers have allowed many customers to prepay for winter fuel, locking in
a price to avoid spikes like the $2-a-gallon highs seen last year.
But they have delayed hedging their own exposure, hoping heating oil futures
prices would cool and lower the cost of buying fixed-price forward
contracts, Blakeslee said.
But now that it's apparent prices aren't heading down, distributors will
find hedging more difficult. Some energy firms have already stopped selling
fixed-price forward contracts, because increased demand enabled them to
fulfill their allocations early.
"It seems a bit early, but a lot of people are panicking," said a Sprague
Energy Corp. source. "We've hit our allocation, and we don't want to
overextend our ability to supply customers at the rack in an efficient
manner."
Govt, Corporate Stock-Building Seen Pressuring Supply
Market uncertainties have made it hard to know when to seek a fixed rate or
whether to do so at all, distributors said.
"We're really just going with the flow," said Steve Centineo, sales
representative at Empire State Fuel, a retailer serving more than 10,000 New
York heating oil customers. "Whatever increase we see, we're just going to
pass it along to the customer."
Several supply pressures are signaling continued price increases.
Typically, the U.S. looks to Europe for excess supply when its heating oil
demand is high and stockpiles are low. But this year, Europe also has a
shortfall and can't be counted on for imports, Blakeslee said.
To build heating oil stocks, the U.S. needs more crude - and U.S. crude oil
stockpiles, near 24-year lows, are razor thin.
Another production increase by the Organization of Petroleum Exporting
Countries could help to ease the tightness. But even if OPEC approves an
increase at its Sept. 10 meeting in Vienna, the extra oil probably wouldn't
arrive in the U.S. until early October, said Tom Bentz, energy analyst at
New York City-based Paribas Futures Inc.
Meanwhile, new buyers are entering the heating oil market and putting
further upward pressure on prices.
The federal government will accept 2 million barrels of heating oil in
October for its new Northeast heating oil reserve. Its intent is to prevent
price spikes and shortages brought on by extreme cold, but the increased
demand for thin supplies may actually end up inflating the price, analysts
and distributors said.
"The heating oil reserve is (an example of) a government with no energy
policy thrashing around trying to find something that's going to work, and
it's going to screw things up," said Jerry McCarthy, vice president of
supply and operations at Castle Oil Corp., based in Harrison, N.Y.
State-level regulations aimed at preventing a recurrence of the price spikes
seen last winter will also boost demand.
In New York, the state Public Service Commission has ordered natural-gas
utilities to ensure that 6,300 customers who pay a reduced rate for natural
gas in return for switching over to distillate fuels when gas supplies are
constrained have the equivalent of a 7- to 10-day supply of heating oil by
Oct. 1.
With all the bullish forces at work, heating oil distributors and customers
who gamble on fair weather and favorable prices are bound to lose their
chips, said Tim Evans, senior energy analyst at IFR Pegasus.
"Sometimes when you roll the dice, you crap out," he said. "It's better to
have the high price you know than the high price you don't know."
-By Stephen Parker, Dow Jones Newswires; 201-938-4426;
Stephen.Parker@dowjones.com |
