Consumers may face high heating bills this winter if refinery outages prevent companies from rebuilding inventories before the cold sets in.
A large number of problems with the nation's aging refining system this summer has drawn down fuel inventories and kept plants struggling to keep up with seasonal gasoline demand.
In addition, new greener distillate fuel requirements for non-road diesel have cut the available pool of cheap fuels used to replace heating oil when supplies wane.
We have 46.9 (days of forward demand cover), which is very interesting because that's the lowest in the last five years in the month of August, said Mark Routt, analyst for Energy Security Analysis Inc (ESAI).
While analysts say much of consumer heating costs will be determined by coldness and length of the winter, U.S. heating oil futures have already risen more than 15 cents over the past two weeks to around $2.13 a gallon on Friday. They are also up about 15 cents compared with year-ago levels.
U.S. refiners typically begin to shift their focus away from producing summer gasoline to winter heating oil in late August or early September.
This year, experts expect another bout of heavy autumn maintenance could cap distillate production already crimped by emergency refinery shut-ins.
You have five times as many refineries offline now than were offline last year, and refineries that are down already tend had to stay down more than refineries that are up, said Adam Robinson of Lehman Brothers.
NEW RULES SKEW DATA
U.S. high-sulfur distillate fuel stocks, including heating oil, stood at 40.7 million barrels in the week ending August 31, according to the U.S. Energy Information Administration, down about 20 million barrels from a year ago.
The drop came in part because inventories of diesel, which must now contain less than 500 parts per million of sulfur, are now counted in different categories than high sulfur distillates, like heating oil, and skew comparisons with year-ago levels.
Adding in stocks of low sulfur and ultra low sulfur diesel -- which can be added to the heating oil pool to make up shortfalls in the winter -- brings total distillate inventories closer to historical norms.
I think you need to look at middle distillates as a combination of diesel and heating oil and in terms of volume, you are smack on the five-year average, said Jan Stuart of UBS Securities LLC, adding that if demand increases it will cut the days of forward demand cover.
Analysts also warned diesel substitution will be more costly this year, as the low sulfur diesel prices at a larger premium to low quality heating oil.
If people were willing to substitute Number 2 (heating) oil demand with diesel supply there isn't any shortage, but they will have to do so at a price, said ESAI's Routt.
It means that Number 2 oil is going to be increasingly more priced like a diesel oil.
Imports from Europe will also likely help plug any shortages, he said, although heavy refinery maintenance there could also cut availabilities.