Winter Fuel Wake Up

Winter worries may start early as supply of distillate and natural gas are the tightest they have been in years with winter ahead. While in recent years Mother Nature has bailed out these markets with warmer than normal winters, this year even a normal winter could drive prices higher.

Already the Energy Information Administration (EIA) is projecting that natural gas bills will be 12% higher and heating oil 17% higher, but based on recent supply data those projections might be on the low end. If we see wintery weather, we could almost see those numbers double.

Just look at yesterday’s distillate number from the weekly EIA report. They reported a massive 5.2-million-barrel drop, putting them 3.6 million barrels below the five-year average. While that might not seem like a lot, consider that back in February supply was 57 million barrels above the five-year average. The trend in supply sharply falling is showing that refiners are having a hard time keeping up with demand even at a time when demand is supposed to be soft. What will happen when winter comes and demand soars?

Nat gas is another concern. While the market is somewhat complacent the supply situation is at a very low level ahead of a winter where we are expected to see record demand. Andrew Weissman of ECB Analytics points out that  the natural gas storage trajectory is now on pace for the second-lowest end-of-season level since 2009—increasing market susceptibility to upside price shocks. He says that with La Nina the weather forecasts just turned sharply colder, with space heating demand newly projected to double from 50 gHDDs this week to 97 gHDDs next week. He says that the supply versus demand balance is projected to be much tighter in November and December than a year-ago and five-year average balances—bolstering the likelihood of substantial upward price moves this winter.  An assessment that we agree with.

In Yesterday’s EIA report we are seeing a much tighter market in general. The total commercial inventory fell by 12.2 million barrels.  This came as U.S. demand spiked by 1.47 million barrels per day to 25.75 million barrels a day. U.S. exports hit another record.

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