Prices for heating oil as well as other energy products trended lower in 2001 in part due to slowing world economic growth. For heating oil, an important factor in determining price is weather. Most heating oil is consumed in the Northeastern United States and winter weather has been mild. This was the case in 2001 leading to less demand for heating purposes. In late 2001 the Organization of Petroleum Exporting Countries (OPEC) agreed to reduce production in an effort to boost prices. As OPEC petroleum output declined, the question was whether the non-OPEC countries would act to support OPEC and reduce production or whether they would increase production to offset the OPEC production cuts.

As 2002 got underway, there was a mix of variables at work in the market. The OPEC production cuts were leading to a decline in production while it was expected that the non-OPEC countries would increase production. In 2002, prices for crude oil and heating oil started to increase. Crude oil prices exceeded $30 per barrel in September 2002 and heating oil prices followed crude oil higher. There appeared to be two factors driving prices higher. One was the U.S. war on terrorism and the increasing likelihood of military action against Iraq, a major oil producer and exporter. As tensions between the U.S. and Iraq increased, oil prices edged higher on fears that any military action would result in a supply disruption. At the same time, OPEC crude oil production began to increase. The other factor supporting higher energy prices was the expectation that world economic growth was starting to increase and that growth would continue into 2003. The high prices for crude oil in late 2002 were leading to increased production and that was expected to eventually lead to lower prices.

U.S. distillate fuel oil production in September 2002 was 3.54 million barrels per day. This represented a decline of 2 percent from a year earlier in the same month and 8 percent less than two years ago. The Energy Information Administration reported that in the nine month period of January-September 2002, distillate fuel oil production averaged 3.57 million barrels per day. This production average was 2 percent less that in the same period of 2001 when production averaged 3.65 million barrels per day but it was 2 percent higher than in the same period in 2000. For all of 2001, production averaged 3.69 million barrels per day. The decline in production caused a drawdown in stocks and that also acted to support higher prices for heating oil.

U.S. imports of distillate fuel oil in September 2002 averaged 204,000 barrels per day. This was down 36 percent from the same month in 2001 when imports averaged 317,000 barrels per day. It was also some 28 percent less than the same month in 2000 when imports averaged 283,000 barrels per month. In the January-September 2002 period, distillate fuel oil imports averaged 213,000 barrels per day. This represented a decline of 42 percent from the same period in 2001 when imports averaged 377,000 barrels per day and a decline of 22 percent from the same period in 2000 when imports were 278,000 barrels per day. For all of 2001, imports of distillate fuel oil averaged 344,000 barrels per day. U.S. exports of distillate fuel oil in the January-September 2002 period averaged 110,000 barrels per day while for all of 2001 they averaged 119,000 barrels. The combination of the decline in fuel oil production along with a steep decline in imports caused a decline in stocks.

At the end of September 2002, distillate fuel oil stocks had declined. In the first nine months of 2002, there were six months when stocks declined compared to four for all of 2001. In the January-September 2002 period, stocks of distillate fuel oil declined on average 56,000 barrels per day compared to a gain of 33,000 barrels in 2001. At the end of September 2002, total U.S. stocks of distillate fuel oil were 1289 million barrels. At the end of 2001, stocks were 145 million barrels.

Futures Markets

Heating oil futures and options are traded on the New York Mercantile Exchange (NYMEX). In London gasoil futures and options are listed on the International Petroleum Exchange (IPE).

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here

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