Commodities market reform, the effect of Northeast refineries closing or being sold, and the importance of attending to margin in a time of decreasing volume were among topics treated at the 2012 Visions Conference hosted by the New England Fuel Institute (NEFI) and the Petroleum Marketers Association of America (PMAA). The event was held June 5-6 at the Sheraton Framingham Hotel & Conference Center in Framingham, Mass.
Discussion of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and its effect on hedging practices was a last-minute addition to the program. (It replaced a scheduled session on the effect of low-sulfur fuel oil on the marketplace.)
Speaking of Dodd-Frank and the overall effort to reform the commodities markets, Jim Collura, NEFI’s vice president for government affairs and founder and coordinator of the Commodities Markets Oversight Coalition, said, “Market stability is the number one concern.”
Part of the challenge of achieving market stability arises from the fact that Dodd-Frank does not include specific reforms, but instead “leaves regulators to fill in the blanks,” Collura said. Coming up with specific regulations now is an ongoing process, which the Coalition continually monitors and comments on. For example, the Coalition has sent letters to Senate and House committees opposing enactment of legislation that would obstruct derivative market reforms outlined in Dodd-Frank, and it has also sent letters to House members asking them to support the “Halt Index Trading of Energy Commodities Act.” The “HITEC Act” is designed to prevent energy trading that drives up fuel prices for businesses and consumers “without regard for supply and demand fundamentals,” the Coalition said.
Ongoing changes in the refining landscape of the Northeast were discussed by Kevin Lindemer, a Boston-based consultant. The closing of a Sunoco refinery in Marcus Hook, Pa., the potential sale of another Sunoco refinery in Philadelphia, and the sale of a ConocoPhillips refinery in Trainer, Pa., to Delta Airlines, have fueled speculation about possible shortages in the Northeast, but refinery closures in the U.S. are “business as usual,” Lindemer said. In fact, the East Coast has significant surplus capacity, including fuel oil, Lindemer said in his presentation at the conference and in an interview afterwards with Fuel Oil News.
“The market did not need those refineries at average utilization rates,” Lindemer said of the Northeast plants. The plants had decreased production in order to avoid flooding the market, he said. Further, their cost of production works against them. “The refineries in the East Coast run higher-cost light, sweet crude oil,” Lindemer said. “The refineries in the Gulf Coast run on a lot of very heavy sour crude oil. That’s much lower-cost.
“If low-cost refineries continue to expand and high-cost refineries don’t, the high-cost refineries go out of use,” Lindemer said. “Expanding an existing refinery is cheaper than building a new one.”
Concern about supply frequently comes up when there are refinery closures, Lindemer said, but the trend over the past fifty years, with one decade-long exception, has been toward fewer refineries, more capacity. The number of plants in the U.S. stood at approximately 330 by 1980 because of government policy to encourage new refinery construction during the 1970s, Lindemer said, citing data collected by the Energy Information Administration (EIA) and the American Petroleum Institute (API). That policy was discontinued in 1980, Lindemer said, and subsequently the industry resumed closing refineries. “We’re a little below 150 [refineries today],” he said.
Lindemer forecast that there will continue to be pressures to close refineries, “particularly with CAFÉ standards coming in over the next few years.” Corporate Average Fuel Economy (CAFE) is the federally required average fuel economy for each vehicle manufacturer's passenger cars and light trucks for each model year.
The U.S. is less and less dependent on off-shore imports, Lindemer said, noting that the U.S. Gulf Coast and even the U.S. East Coast have been exporting large amounts of distillate, “because it’s more attractive to export it. There’s no market locally for it. The way things look today and have for a while, other than the usual events that we all get concerned about like disruptions or hurricanes or extreme cold snaps there’s really no reason to be too concerned about supply.”
That applies to ultra low-sulfur fuel oil too, Lindemer said. Regulations became effective July 1 in New York City and New York State that require use of ultra low- sulfur fuel oil – heating oil with sulfur content of no more than 15 parts per million (ppm). The requirement put New York ahead of other states intending to switch to lower sulfur heating oil that burns cleaner and results in fewer emissions.
“I don’t think it’s going to have much of an effect on the adjacent markets at all,” Lindemer said of New York’s switch. “The market can supply ULSD fuel to meet the New York requirement.”
New York City also will require, beginning Oct. 1, that ultra low-sulfur fuel oil contain two percent biofuel. Satisfying that requirement should not be at all difficult, Lindemer said. “There’s plenty of biodiesel around,” he said. “That industry’s running at very low utilization rates. I don’t see supply being an issue.”
New York State has not passed legislation to match New York City’s requirement that ULS fuel oil contain two percent biofuel, but that is a goal of the Empire State Petroleum Association (ESPA). As of this writing, bills that would require two percent biofuel content in fuel oil were pending in both houses of the New York State legislature, Thomas J. Peters, ESPA’s chief executive officer, said.
Despite the failure of Congress to reauthorize The National Oilheat Research Alliance (NORA), the group manages to remain active through partnerships with other organizations, such as the National Biodiesel Board and the New York State Energy Research & Development Authority, said John Huber, president of the Alliance. Current or recent projects include the posting of training videos on YouTube and research into the effects of higher biodiesel blends on seals, Huber said.
For fuel oil dealers, decreasing volume was a fact of business during last season’s non-winter: two consultants, John Levey of Oilheat Associates and John Nardozzi of Nardozzi Consulting, advised attendees to focus on margin.
“So many people don’t know what their margin should be,” Nardozzi said. Besides payroll, rent, insurance, employee benefits, advertising, loan payments and cost of new equipment, remember to include profit, he said. Dealers should monitor gallons and margin every day, continuously working to maintain or add to margin, he said.
“Gallons fell off the table this year,” Nardozzi said, generally dropping by more than a third. Compounding the challenges were a price spike, and to some degree for many dealers, loss of customers to discounters or to other fuels, Nardozzi said.
For those whose businesses are threatened, Nardozzi enumerated survival tactics: stop all discretionary spending; postpone capital expenditures; use up inventory; let seasonal employees go; lay off as many employees as possible; stop all overtime; shorten the work week; take excess vehicles off the road.
The last point was a pet peeve for both Nardozzi and his co-presenter Levey.
“Look at your company as if you’re going to buy it,” Levey advised. “The first thing I hope you notice is that you have too many trucks.” Most dealers, Levey said, “are grossly over-trucked.” Besides the accumulated cost of registration and insurance, Levey pointed out, the vehicles are losing value over time.