Living in the northeast US, I often have been asked by neighbors what is the better option for heating a house: natural gas or heating oil. I have oil, but don’t have the option for gas, since the local utility hasn’t run a pipeline down my relatively small street.
In the past I would always reply that I favored oil. Natural gas supply in the US is limited and can’t be bolstered by significant imports from abroad, I would tell them. By contrast, a surge of heating oil imports from a wide range of places, with minimal sulfur restrictions that might slow the supply, would always be available to put an end to a price surge created by a prolonged drop in the temperature.
That’s what I used to say. I don’t say that anymore.
Natural gas supplies in the US have been bolstered by the surge of gas produced from shale, a shift of enormous implications for the future of how the US meets its demand for energy. Meanwhile, even before OPEC cuts, crude supply was strained, and the supply of middle distillates, which includes heating oil, was even more pressured.
It’s about to get pressured even more, with the states of the northeast US about to shut off their “come on, come all” regulations allowing supplies of high-sulfur material into their market. As Platts’ Beth Evans has been reporting, states have been engaged in (so far) non-binding talks that would move to a standard of 500 ppm sulfur heating oil, from the current 2,000 ppm level in 2014. A second drop to as low as 15 ppm could follow in 2018.
Jim Collura, vice president for government affairs with the New England Fuel Institute, told Platts recently that the move was “doable” and by 2014, “looks almost like a certainty.” The plan is being pushed by the Mid-Atlantic/Northeast Visibility Union, which is made up of the relevant heating oil-burning states that stretch from the District of Columbia up through Maine. What happens in the northeast US heating oil market has an outsized impact on the market, because the distillate benchmark for Americas trade is the NYMEX heating oil contract, which has a New York harbor basis.
States must individually implement the rules. New Jersey looks likely to go first.
Environmental changes in fuel specifications tend to draw apocalyptic projections several years out about the impact on the market. Often times, significant disruptions do occur. But at other times, such as the end to Mtbe blending in the US, markets prove resilient and the worst fears are not realized.
But concerns about the switch in the northeast US are rooted in the continuing desulfurization of the distillate pool and whether supplies can keep pace. For example, up until recently, the price of ultra low sulfur diesel in Europe and the US, as measured by percentage, was at levels significantly more than historic norms. (It has since pulled back). Some analysts, including JP Morgan’s Lawrence Eagles and economist Philip Verleger, have cited the diesel squeeze as one of the key reasons for last spring’s surge in crude prices, with crude being dragged higher on the back of tight diesel.
Marine fuels under the jurisdiction of the International Maritime Organization are set to go through a regulatory shift that will significantly reduce sulfur in bunker fuel and marine diesel. And now, northeast US heating oil faces the same prospect. Tax breaks in Europe continue to promote the purchase of diesel-fueled cars rather than those running on gasoline. Desulfurization of diesel results in a small but perceptible drop in the amount of distillate yield from crudes. Taken together, it all puts pressure on diesel supplies.
This is all happening as the supply of liquids to refiners is getting significantly less friendly for distillates. Crudes are getting more heavy and sour. New liquids sources weigh heavily toward condensates and ethanol, which are gasoline substitutes and not good sources of distillates. Light sweet crudes from places like Nigeria are restricted by political strife. The weak economy has delayed the construction of new hydrocracking capacity, which is vital to meeting the demand for new distillates. All of this could be setting up another period of tight diesel supplies.
I think maybe I’ll call that gas utility and ask nicely to run that pipe down my street.