Heating oil supplies down sharply going into winter

Greased Lightning!

Greece throws the world in turmoil as France and Germany say that the Greece referendum is a vote on whether Greece wants to stay in the Eurozone. In the meantime, Big Bad Ben Bernanke says that QE 3d is a real possibility as he lowers the growth and jobs forecast for the US economy. The Energy Information agency added a few surprises with a big build in crude oil and a disturbing drop in distillates that could send chills across your spine if you heat your home with heating oil. Yet the markets seems to hope that the nova convening G20 can bring order back to the market place in a world where we don't know where the next crisis might come from.

Now austerity is one issue but having a sugar daddy to pay your bills is another. Greek PM Papandreou threw caution to the wind for what purpose no one is quite sure. If it was to save his political backside well perhaps he is one. European leaders on the other hand reframed the debate by telling the people of Greece that the referendum vote about the Greek bailout package may be a vote on whether they want to be in or out of the EU. German Chancellor Angela Merkel and French President Nicolas Sarkozy has pulled the plug on the Eurozone rescue aid driving Greek bonds to 100% and perhaps putting the country on the verge of bankruptcy. Sarkozy says that there will be, "No French taxpayer money, no German taxpayer money" until the question is answered. In the meantime global markets tank but are finding hope that somehow the G20 will restore sanity or a split in Papandreou inner circle might find hope that Greece will accept its partners’ handout.

The big drop in distillates in yesterday's report caused the Energy Information Agency to talk about heating oil supply. The EIA warned that, "East Coast distillate inventories have been on the decline since the end of August, a time when they normally build ahead of winter. Distillate stocks in the Northeast, the Nation's largest heating oil market, typically peak in November, to help meet peak heating demand during the months of December, January and February. Weekly data show the total East Coast distillate inventories peaking on Aug. 26 and dropping 4.7 million barrels by Oct. 28, an average draw of 75,000 barrels per day. Last year during this same period, in contrast, distillate stocks were higher, and changed very little. This year's counter-seasonal decline is mostly coming from the Central Atlantic, a region serviced by several product pipelines from the U.S. Gulf Coast. This region includes New York Harbor, the delivery point of the New York Mercantile Exchange (NYMEX) heating oil and reformulated gasoline blend stock for oxygenate blending (RBOB) futures contracts and also serves as a distribution point for much distillate moving to New England."

The recent decline in East Coast distillate inventories leaves stocks in the region 11% below their five-year average. What volume changes account for such an unusual departure from seasonal patterns? In theory, a counter-seasonal stock draw could reflect higher demand, lower supply, increased exports or some combination of those factors.

The demand factor is easy to rule out. Through August, East Coast distillate product supplied (a proxy for demand) has been about the same this year compared with last. Furthermore, there have been no signs that demand since August would have been unusually high.

Supply does not seem to be the issue either. Refinery capacity in the Northeast is about the same over this time as was available last year. The 185,000 bbl/d Trainer refinery was shut down this fall, but the 182,200 bbl/d Delaware City facility, which had been shut down last year, was subsequently restarted. Average production of distillate on the East Coast from Aug. 26 through Oct. 28 actually exceeded last year's level over the same period by 36,000 bbl/d. Distillate imports, however, were lower by an average of 17,000 bbl/d, countering about half of the production increase.

That leaves exports as potentially explaining most of the volume difference, but distillate exports are not collected on a weekly basis. Monthly data, however, show the United States exported a record 895,000 bbl/d of distillate fuel in August, the most recent month for which data is available. Regionally, distillate exports from the East Coast have increased 59% (33,000 bbl/d) January through August in 2011 over 2010; exports from the Gulf Coast, the main U.S. exporting region, have increased 21% (104,000 bbl/d). Europe and Latin America are major destinations for U.S. distillate exports. In September and October 2011, the price difference for distillate between New York Harbor and Europe did seem to invite some movement to Europe."

We still feel the best way to trade oil is by swing trading it right now. With the news changing every minute you have to be adapt and nimble at buying and selling. This is not a time to try and catch every move.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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