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O I L PRICE S Near Term Oil Prices Domestic demand is low and supply is high, but according to several analysts we can likely expect heating oil prices to stay around $3 into the spring BY K E I T H RE ID "I T'S BEEN A VERY MILD WINTER IN THE NORTHEAST AND that along with the overproduction has been nega- tive on heating oil," said Brian Milne, Telvent DTN's refined fuels editor. "But heating oil has been bumped up and is holding over $3 for most of January. That's been due to the refinery closures in the Philadelphia area combined with some shutdowns in Europe and some work actions there that are upsetting lifting. It's tricky. Initially I thought this would hold above $3 through February for these factors plus the Iranian event. Now when you look at the data on product demand in the United States – it's just so weak. And as you look at that you'll likely see the heating oil contract slip below $3, but I don't think you're going to see a big selloff. So you're prob- ably looking at heating oil in a futures contract at $2.90 to $3.10 moving at least through February." In a general sense, Peter Beutel, founder and president of Cameron Hanover, which specializes in helping companies understand and manage energy risk, sees a familiar picture (aside for the high baseline price point) with some additional impact from the weather. "This is one of the most seasonally defined times of year that follows the script we have seen play out again and again and again," he said. "Basically, we go through this period of very low gasoline demand in the first two weeks of the New Year, recover- ing gasoline demand from that point—though not seriously until after April or May. Heating oil demand is determined largely by the weather and diesel demand tends to follow the more seasonal model laid down by gasoline. So, at this particular moment with warm weather we have very light demand for everything across the refined barrel that has to pick up in one of several ways. Either we will see colder weather and better heating oil demand or warming weather and better transportation demand. We'll go through the seasonal March, April, May and by May we will start to be looking tight, but then the refineries start to come back out of maintenance." As far as a product strategy is concerned, Beutel noted: "Early March is always a good time to lay on product—obviously you have to use some sort of stop protection—but at this stage I would be buying these markets when they are oversold and selling them when they are overbought because they seem to be in big trading ranges," he said. "I don't think we are going to see a major breakout higher or lower this year until something really changes. So right now I'm trading it as it's in the big trad- ing range where you get prices oversold, you get them down in supports, you buy them, you see them rally and they get over- bought and you sell them and you look for them to come back down again." Looking at prices annually, the latest forecast from the U.S. Energy Information Administration [states that] average house- hold heating oil expenditures are now expected to increase by 4 percent this winter heating season (Oct.1 to March 31) compared with 2011 and average out at $3.84 (retail). In contrast, natural gas and propane expenditures are projected to decline by 7 per- cent and 1 percent, respectively, and electricity expenditures are 2 percent lower than last winter's levels. What's more disturbing is that this forecast included 2013 projections, which show an average heating oil retail price of $4.03 based upon expected crude prices and global supply and demand. Will that be the case? "I have to believe, that possibly as much as 75 percent of a barrel of oil is the gold effect," said Beutel. "Because gold is so much higher, black gold ought to be worth so much more. But I do not see any industrial excuse for this even with China having 9 percent growth. I still say we would be capable of keeping every- thing in order and living perfectly well with an oil price between $35 and $45 if it were not for the effect gold has had on oil. I don't know. It's a strange period of time we're in right now. At some point I have to believe it will come back. Maybe it is a brave new world and will always have oil in $100 per barrel range, but I have a hard time believing that." l FON 16 FEBRUARY 2012 | FUEL OIL NEWS | www.fueloilnews.com