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Heating Oil - Commodities Info

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Major Characteristics

  • Heating oil and Diesel are classified as distillate fuel oils and rank second behind gasoline as the most-consumed liquid fuels. While, diesel powers heavy construction equipment, trucks, buses, tractors, trains and automobiles, heating oil (often referred to as No. 2 fuel oil in US) is used in the central heating of homes and small buildings.
  • The main difference between the two fuels is that heating oil is allowed to contain more sulfur than diesel fuel. The US environment Protection Agency (EPA) stipulates that diesel used for transportation cannot have sulphur more than 500 ppm (parts per million). However, heating oil is not subject to such a mandate and it usually contains around 2000 - 2500 ppm of sulphur.
  • It is estimated that in the US, approximately 12 gallons of distillate are produced from a 42-gallon barrel of crude oil. Of these 12 gallons of distillate, less than 2 gallons are heating oil, and the other 10 are diesel fuel.
  • Diesel fuel requires additional processing to remove sulfur and is therefore more costly to produce than heating oil. Diesel fuel is often priced at a stable premium to the price of heating oil as both are always produced together and are chemically similar.
  • As heating oil is derived from crude oil, its price shows a high correlation with crude oil prices. Crude - Heating Oil crack is the margin refiners earn when they refine crude oil into various products, especially heating oil, which varies between US $ 4 - 14 a barrel.

Global Scenario

  • World-over, residences and businesses are estimated to use about 10 billion gallons of heating oil each year. The US is the world's largest consumer of residential heating oil, with total consumption of residential heating oil in 2008 reported to be around 4.6 billion gallons. Of the 111 million households in the United States, approximately 8 million use heating oil as their main heating fuel.
  • Globally, more than three-fourths of the distillate sales, as diesel are for transportation and only a little more than 10% is used for residential heating.
  • US is the largest refiner of crude oil holding 20% of the total world refining capacity of 87,700 kilo barrels per calendar day, followed by China (8.9%), Former Soviet Union (8.8%), Japan (5.3%) and India (4.1%).
  • However, the production of heating oil or diesel in any country depends on the type of economy it follows. For eg, while US has adopted a gasoline based economy, India is largely a diesel based economy, leading to more production and consumption of gasoline in US and High-Speed Diesel (HSD) in India.

World Kerosene Markets

  • Chicago Mercantile Exchange (CME), which has acquired New York Mercantile Exchange (NYMEX) and Intercontinental Exchange run heating oil derivative markets.

Indian Scenario

  • India only produces diesel, which is designated as High Speed Diesel (HSD).
  • The growth of the Indian economy has lead to increasing demand for energy for transportation and industry since the recent 10-15 years. As India is predominantly a diesel based economy, the demand for diesel has been increasing at a quick pace.
  • India's consumption of High Speed Diesel in 2008-09 is estimated to be 15.9 billion gallons in 2008-09, which is up by 30% from 2004-05 consumption of 12.2 billion gallons.
  • India's production of High Speed Diesel has shown a sharp improvement in the previous two decades, aided by the setting up of new refineries and increased capacity utilization. The production of High Speed Diesel has increased from 5.3 billion gallons in 1990-91 to 19.4 billion gallons in 2008-09, marking a 265% increase.
  • High Speed Diesel exports from India have grown substantially, with it jumping from 2.6 billion gallons in 2005-06 to 4.2 billion gallons in 2008-09, representing an increase of above 60%, exposing the exporting Indian refineries to the huge volatility in global prices.
  • The majority of refineries in India are state-owned and follow a steady pricing policy as per Government regulations. The major refiners include Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Reliance Industries Ltd (RIL). The RIL being a private player exports most of its production of petroleum products.

Market Influencing Factors

  • Globally, heating oil prices are highly correlated with crude oil prices as cost of production of heating oil includes the cost of crude oil used plus cost of refining, distribution and storage.
  • Thus, all factors influencing crude oil prices have a profound influence on heating oil prices too. These factors include, supply-demand, global economic scenario, natural disasters, currency fluctuations, geo-political tensions, interest rates, prices of other assets, commodities etc.
  • The demand for heating oil is highly seasonal as residential-space heating is the primary application of heating oil. Prices are normally observed to rise during the winter months, i.e. November - March.
  • The supply-demand scenario in US, is very important as US is the largest consumer, accounting for around 40% of global consumption.
  • The prices are also influenced by the fundamentals of diesel fuel, as both are very similar and produced together. Thus, when demand for on-highway diesel increases, refiners often generate a greater proportion of diesel than heating oil from the distillate stream, and vice versa when heating oil demand increases.
  • The worldwide diesel demand is being propelled mainly by economic growth, particularly in developing nations, as well as a push in Europe to increase the usage of diesel vehicles. More than half of European cars are fueled by diesel.
  • Storage also plays an important role in trade patterns and prices. When inventories are full, this ready availability of large supplies drives down the price. In contrast, when stocks are relatively low, prices tend to increase. Disruptions in production due to extreme weather or other unforeseen events can also lead to prices picking up.

Measurements

  • 1 US barrel = 42 US gallons.
  • 1 US barrel = 158.98 litres.
  • 1 MT = 7.33 barrels
  • Note: barrels per tonne vary from origin to origin.

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