Cold snap drives up US residual fuel demand
Date: 27-Jan-03
Country: USA
Demand for residual fuel, the heavy gunk left at the bottom of the barrel after the refining process, averaged 1.0 million barrels a day this past week, the U.S. Energy Information Administration reported, a level not seen since October 2001.
At the same time, the EIA reported the nation's residual fuel stocks have dropped to their lowest level since 1954, a trend driven in part by power generators' growing use of clearner-burning natural gas to meet stricter pollution rules.
Electric utilities are among the biggest buyers of residual fuels on the East Coast, where oil-fired power plants account for about 10 percent of the region's power generation.
In Connecticut, oil-fired power plants still generate about 20 percent of the state's electricity.
But Massachusetts, reflecting the general trend to natural gas, now gets less than 1 percent of its power from oil-fired plants, down from 34 percent in 1990.
Nevertheless, many of the gas-fired plants can also switch back to residual fuel when the price is right.
A steady stream of arctic air this week in the Northeast drove natural gas prices in New York to a lofty $18.50 per million British thermal units this week - a two-year high - making resid priced at $30-40 a barrel a real bargain.
When recalculated in terms of energy content, an $18.50 natural gas price is equivalent to $116 a barrel.
STAGE SET LAST FALL
Traders said strong fuel oil demand from Asia last fall that triggered a flood of high sulphur exports from the U.S. Gulf Coast slowed stock building ahead of winter and helped set the stage for the current tight scenario.
In addition, an eight-week strike in Venezuela that cut the country's heavy crude and high sulphur exports to the U.S. further tightened the market as some refiners slowed output.
Then the coldest weather in years hit the East Coast in January, triggering a rush for barrels that saw demand jump more than 35 percent from a year ago and sent total stocks down to 29.6 million barrels, the lowest in almost 50 years.
In its weekly review of the oil market released, EIA said that residual fuel stocks were likely to remain tight for the near term.
HIGH PRICES MEAN MORE SUPPLY
Spot 1.0 percent residual fuel in New York Harbor, a key utility grade, has been on a steady track higher for the past two months, gaining some 32 percent to about $32.75 a barrel.
But some traders said high U.S. prices should soon lead to more supply.
"We've got some of the highest prices in the world, so we should be attracting some barrels," said one trader.
In addition, traders noted talk Venezuela was looking to sell high sulphur material held in inventory in the Caribbean.
The quantity could total several million barrels and go a long way toward relieving the tightness, but so far, it has not been confirmed.