As we start to head into the spring months many heating oil marketers are looking to make hedging decisions for next year’s season. Fuel Oil News contacted oil and product analysts to get their opinion on what to expect. As usual, these are only projections that could be right, or quite wrong. Any product acquisition decisions should take that to heart and only use these projections as one of many data points in the decision-making process.
The latest (Jan. 11, 2011) forecast from the Energy Information Administration stated the following in relation to the remainder of this heating season:
EIA expects average household expenditures for space-heating fuels to total $990 this winter, about $22 higher than last year. EIA projects higher expenditures for heating oil and propane, flat expenditures for natural gas, but lower expenditures for electricity. A forecast of milder weather than last winter in the South and the West leads to lower fuel consumption in those areas.
“We basically see heating oil prices being driven by crude oil prices,” senior EIA economist Tancred Lidderdale told Fuel Oil News. “And for next winter, if we look at a winter average price we would have a forecast of $3.14 for the fourth quarter of 2010, $3.37 for the first-quarter of 2011, so let's say an average of about $3.25. And looking forward to next year we’re looking an average of about $3.50.”
Lidderdale noted that as a rule of thumb, every dollar per barrel increase in the price of crude oil increases the price of refined petroleum products by about 2.4 cents per gallon. Therefore, a $10 increase in the price of crude oil raises heating oil and gasoline by about $.24 per gallon.
With that in mind, the EIA forecast stated the following:
WTI crude oil spot prices averaged over $89 per barrel in December, about $5 per barrel higher than the November average, as expectations of higher oil demand, combined with unusually cold weather in both Europe and the U.S. Northeast, lifted prices. EIA has raised the first-quarter 2011 WTI spot price forecast by over $7 per barrel from the last month's Outlook, to about $92 per barrel. WTI spot prices rise to an average $99 per barrel in the fourth quarter of 2012. Projected WTI spot prices average $93 per barrel in 2011 and $98 per barrel in 2012.
“The supply is looking fine so we should see a seasonal decline coming out of the winter,” said Brian Milne, refined fuels editor at Telvent DTN. “A lot of heating oil distributors look at the first few weeks of June as being the best time to buy. We're going to have a pullback – I would imagine – as the price is getting a little bit overextended on the upside. If it stays really cold through the end of the heating season, we could see the market being supported at high prices. But coming out of the winter, I think we'll see that contango market that should offer some opportunities to lock in some prices even if you do it incrementally right up until June.”
Milne noted that lately, market forces relative to gasoline can impact heating oil prices. “The markets – and we are talking about speculators – have really focused on what is going on,” he said. “The one thing to be concerned about if you're a buyer is what does that pre-peak season gasoline rally do to the rest of the market? We watched it last year as the prices raced higher during that March, April, May time frame and does that maintain a higher heating oil/diesel price? That is one thing to be concerned about and also will crude keep on ticking higher to limit the downside.”
Milne suggested targeting towards the end of the heating season. “If you see a good selloff, it might be a good time to pick up some supply because it could just be a downside correction and higher trending market. March through July should offer some opportunities before the buying starts again replenishing inventory. That's kind of what it's looking like right now, but it's a bit dicey,” he said.
While the opportunities might not be exceptional in the next few months, they might end up being as good as it’s going to get. “At this point in time, March is not looking like the best time to buy oil for next winter,” said Peter Beutel, president and founder of Cameron Hanover, an energy risk management firm. “It may turn out to be a good time anyway. Normally, in January and February we are watching these markets hit lows or selloff, but now we're looking at new highs. So it appears that we may even short-circuit the seasonal and just go straight into it. And then, sometime in March, April, May or June, we might find (the market) forced into a (price drop) phase.”