ULSD NY Harbor Jan '25 (HOF25)

Description

Heating oil is a heavy fuel oil that is refined from crude oil. Heating oil is also known as No. 2 fuel oil and accounts for about 25% of the yield from a barrel of crude oil. That is the second-largest "cut" after gasoline. The price to consumers of home heating oil is generally comprised of 42% for crude oil, 12% for refining costs, and 46% for marketing and distribution costs (Source: EIA's Petroleum Marketing Monthly). Generally, a $1 increase in the price of crude oil translates into a 2.5-cent per gallon rise in heating oil. Because of this, heating oil prices are highly correlated with crude oil prices, although heating oil prices are also subject to swift supply and demand shifts due to weather changes or refinery shutdowns.

The primary use of heating oil is for residential heating. In the U.S., approximately 8.1 million households use heating oil as their main heating fuel. Most of the demand for heating oil occurs from October through March. The Northeast region, which includes the New England and the Central Atlantic States, is most reliant on heating oil. This region consumes approximately 70% of U.S. heating oil. However, demand for heating oil has been dropping as households switch to a more convenient heating source like natural gas. In fact, demand for heating oil is down by about 10 billion gallons/year from its peak use in 1976 (Source: American Petroleum Institute).

Refineries produce approximately 85% of U.S. heating oil as part of the "distillate fuel oil" product family, which includes heating oil and diesel fuel. The remainder of U.S. heating oil is imported from Canada, the Virgin Islands, and Venezuela.

Recently, a team of Purdue University researchers developed a way to make home heating oil from a mixture of soybean oil and conventional fuel oil. The oil blend is made by replacing 20% of the fuel oil with soybean oil, potentially saving 1.3 billion gallons of fuel oil per year. This soybean heating oil can be used in conventional furnaces without altering existing equipment. The soybean heating oil is relatively easy to produce and creates no sulfur emissions.

The "crack-spread" is the processing margin earned when refiners buy crude oil and refine it into heating oil and gasoline. The crack-spread ratio commonly used in the industry is the 3-2-1, which involves buying one heating oil contract and two gasoline futures contracts, and then selling three crude oil contracts. If the crack spread is positive, it is profitable for refiners to buy crude oil and refine it into products. The CME Group has a crack-spread calculator on their web site at www.cme group.com.

Heating oil futures and options are traded at the CME Group. The CME's heating oil futures contract calls for the delivery of 1,000 barrels of fungible No. 2 heating oil in the New York harbor. Futures are also traded on ICE Futures Europe and the Multi Commodity Exchange of Index (MCX).

Prices - CME heating oil futures prices (Barchart.com symbol code HO) on the nearest-futures chart closed 2023 down -23.3% at $2.5289 per gallon.

Supply - US production of distillate fuel oil in 2023 fell by -2.4% yr/yr to 4.890 million barrels per day, below the 2018 record high of 5.164. Stocks of distillate fuel oil in December 2023 were up by +9.9% yr/yr at 130.713 million barrels. US production of residual fuel in 2023 fell by -2.7% yr/yr to an average of 265,032 barrels per day, which is about a fifth of the production level of over 1 million barrels per day produced in the 1970s. US stocks of residual fuel oil as of December 2023 were down by -21.5% to 24.129 million barrels, below the 2015 record high of 42.189 million barrels.

Demand - US usage of distillate fuel oil in 2023 fell by -2.5% yr/yr to 3.928 million barrels per day, below the 2007 record high of 4.198 million barrels a day.

Trade - US imports of distillate fuel oil in 2023 fell by -11.1% to an average of 168,238 barrels per day, below the 2006 record high of 365,000 barrels per day. US imports of residual fuel oil in 2023 fell by -45.7% yr/yr to 109,542 barrels per day, far less than the levels of over 1 million barrels per day seen back in the 1970s.

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