The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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www.fueloilnews.com | FUEL OIL NEWS | NOvEmbEr 2014 17 Fuels l F O N to help balance the market [and keep prices higher]," Milne said. "It appeared that Saudi Arabia would make the cuts and make room for the new supply coming online, including Iraq, and it seemed to be what everybody was thinking. However, it's changed with the Saudi's cutting the market prices and signal- ing that they are looking to maintain market share in Europe and Asia—that's a big development. That upends what the Bulls were thinking, and that turned everything on its head. When the Saudi's made that decision we saw the hedge funds that were still in the market unloading positions in a big way, and it's triggered responses with Iran cutting prices and Kuwait indicating they're cutting prices to defend market share. That's a big deal. You hear the Saudi say they can live with an $80 per barrel price for a number of years." While market share is likely a core driver, there are more issues at work with the decision. The United States has really developed into an energy producing giant through shale production technol- ogy, and that includes oil as well as natural gas. However, extract- ing oil from shale, while more efficient than ever, still has a premi- um in production costs compared to conventional oil production. Higher oil prices have easily fueled U.S. oil and gas production expansion, and lowering those prices is seen as applying a brake to the expansion and perhaps even initiating a retraction. "You have some good analysts noting that it isn't just about maintaining market share among OPEC members, but it's also about helping to slow U.S. shale oil production," said Milne. "The Saudi's do not come out and say that, but that is the think- ing because some of the higher cost shale oil producers need an $80 price. So you start putting pressure on those producers and they start pulling back from that supply growth, because supply growth has outpaced estimates over and over again." There is previous history to suggest this can be an effective policy. As prices were ramping up before the crash in 2008— with suggestions from entities like Goldman Sachs that $200 per barrel oil was on the way and here to stay—there was a sig- nificant expansion in oil production underway. The 2008 price crash was devastating for many producing companies initially, though prices recovered significantly in the following years. However, Milne noted that the U.S. shale production might not be as sensitive to price pressures as might be assumed. "There has been a string of stories out there talking about consolidation among the U.S. oil producers because some of those operators are stretched thin," Milne said. "But, I just saw not too long ago the International Energy Agency's Executive Director Maria Van der Hoeven noting that the [producer's] breakeven price was below $80, and about 82% had a breakeven price of $60 or lower. So those numbers could mean that some of these U.S. producers can hold on longer. What it all means though is we have lower prices, and will have them for a while." Just what does he expect from a price standpoint? "I was expecting the average [for retail gasoline] to come in somewhere between $3.10 and $3.20 per gallon around the middle of November, and now I'm thinking we are going to punch below $3 with the bottom around $2.90 or $2.85," said Milne. "For heating oil, futures could go down and test the low $2.20 range. In January, when retail prices are likely to be the strongest, you're likely looking at around $3.50. If Europe has a mild winter that could limit the amount of distillates exported, and the government is forecasting the likelihood for above normal temperatures in the Northeast. This would limit price gains." A milder winter in the United States was noted in the Energy Information Administration's Winter Fuels Outlook released on Oct. 7. As the report stated: Forecast temperatures based on the latest forecasts from the National Oceanic and Atmospheric Administration (NOAA) are much warmer than last winter east of the Rocky Mountains, with the Midwest 16% warmer, the South 12% warmer, the Northeast 11% warmer. This prediction is at odds with the forecast from ImpactWeather's StormWatch Manager/Meteorologist Fred Schmude, presented in the FON fuels price outlook last month. As he stated (and as was unfortunately partially cut off through a production error): "So we should see a similar winter to last year, but what I'm concerned about is that we may be getting into a pattern similar to what we saw in the late 1970s," Schmude said. "So we could be seeing, at times, some historic cold." This prediction is also at odds with the meteorological resourc- es Milne uses at Schneider Electric.