Americans might be in for a shock when it comes to their winter heating bills, particularly if the season turns out to be colder than usual.
This anticipated increase in costs can be attributed to a combination of factors, including OPEC+ supply cuts and heightened demand from Europe, resulting in remarkably low stockpiles of distillate fuels in the United States.
According to analysts, the inventory levels for distillate fuels, encompassing diesel and heating oil, were approximately 15% lower than the five-year average for this time of the year by late August.
The Energy Information Administration reported that these stocks stood at just below 118 million barrels, equivalent to approximately 31 days of supply.
This concerning situation is underscored by Phil Flynn, an analyst from Price Futures Group, who emphasizes that the nation is operating on very thin margins in terms of its fuel reserves. Flynn warns that if a cold winter does ensue, substantial price spikes are likely to follow.
One of the contributing factors to this predicament is the failure of refiners to amass substantial stocks in anticipation of the seasonal surge in demand.
The scarcity of medium and heavy crude oil grades, which are rich in distillates, has hampered efforts to build these inventories.
Production cuts implemented by OPEC+ members have also tightened the global market for medium sour crude and middle distillates.
Saudi Arabia’s independent cuts further exacerbate this situation, according to Bjarne Schieldrop, chief commodity analyst at SEB.
Adding to the depletion of stockpiles is the increased demand from Europe, driven by U.S. exports, which have risen due to sanctions imposed on Moscow’s energy trade following Russia’s incursion into Ukraine.
Despite a relatively lackluster demand for distillates in the first half of the year in the U.S., weekly data from the Energy Information Administration shows that distillate product supplies – a demand indicator – have been consistently lower year-on-year, trailing behind the previous five-year average by about 4%.
A fire incident at Marathon Petroleum’s refinery in Louisiana, the third-largest in the U.S., briefly propelled U.S. diesel futures to a seven-month high on August 25.
This event underscores the need for maintenance in U.S. refineries, which is expected to lead to reduced capacity through the autumn season.
Bank of America analysts anticipate further price increases in distillate products and improved refining profits due to the existing scarcity.
Despite softer demand, the lack of diesel inventories and subsequent price surges might continue as the market seeks to address supply and demand dynamics prior to the onset of winter.