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8 • OIL
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ENERGY
costs have increased, LIHEAP funding has been an important lifeline
that helps prevent people from having to choose between heating
their homes, paying their bills, or going without food or medicine.”
All other New England Senators co-signed the letter.
Due to fiscal restraints in Washington, federal LIHEAP funding is in a
precarious position. In each of his last three budget requests President
Obama has requested substantial cuts to the program. For Fiscal Year
2014, President Obama has proposed cutting LIHEAP by $473 million
(16 percent). This would result in a $58 million cut in LIHEAP grants to
New England states alone. Insufficient funding from the federal
government could lead states to raise or propose new taxes and fees
in order to increase revenues and close the fuel assistance funding
gap. While it is an imperfect program in need of reform, NEFI believes
the federal LIHEAP program should be fully funded.
Increase in Foreign Demand
Pushes Up U.S. Distillate Prices
New statistics from the U.S. Energy Information Administration
suggest that exports of diesel fuel this winter could be a critical wild
card in fourth-quarter supply and pricing. The EIA estimates that
distillate exports for the last quarter of 2013 could reach 1.386 million
barrels per day (b/d), exceeding all previous records. By comparison,
U.S. refiners exported only about 400,000 b/d of distillate in 2011.
Based on most recent distillate production numbers, this means
that one in every three-and-one-half barrels of U.S. distillate output is
being exported overseas, principally to Latin and South America, but
also to the South Pacific and Europe. Meanwhile, distillate imports are
dwindling down to nothing. U.S. companies imported just 137,000 b/d
of No. 2 fuel, mostly into the Northeast, but that number is a fraction of
the typical rate one year ago. Uncertainty about the future of the large
Canadian Come-By-Chance refinery in Saint John, Newfoundland, as
well as the closure of Imperial Oil’s Dartmouth, Nova Scotia, refinery
could keep imports in check through the rest of the year.
Traders acknowledge that global demand, principally from
developing countries, is the key driver for diesel prices, regardless of
the port of origin. And if that demand stays consistent or improves as
European refineries sputter, the calculus could point to a larger-than-
normal drawdown of U.S. distillate inventories through the rest of the
year. Distillate inventories in the fourth quarter last year showed
virtually no change, but they dropped 14 million bbl in 2011; 11.4
million bbl in 2010; and 12 million bbl in 2009. At 130.9 million bbl,
stocks are lower than they typically are in late September, perhaps
because of the brisk cargo departure rates.
Domestic demand last year averaged 3.8 million b/d and 3.9 million
b/d in October and November and never topped 4 million b/d
throughout 2012. But adding 1.4 million b/d of export demand to 3.8
million b/d of domestic consumption means refiners would need to
produce about 5.2 million b/d this fall in order to stay even. However,
the EIA estimates daily production rates of about 4.6 million b/d in the
fourth quarter. This still leaves the country with domestic and offshore
demand that tops output by 500,000 b/d. Over the course of 90 days,
that could amount to a fourth-quarter distillate stock decrease of 45
million bbl, which would put U.S. primary inventories well below 90
million bbl.
No one expects to see 90 million bbl or less distillate inventory in
winter months, but the high export totals underscore why some trading
companies are very enthusiastic about diesel and heating oil. Forward
markets for distillate are still slightly back-dated, so there is no real
incentive to hold inventory and play the “carry trade.” Refiners,
meanwhile, are struggling with distillate cracks that have been steadily
whittled down since midsummer. Considering low inventories, modest
refinery turnaround work and high exports, the EIA estimates that prices
will average $16/bbl to $22/bbl margin in the fourth quarter of 2013.
EPA Rule Expands Heating Oil Uses
Qualifying for RINs Generation Under RFS
The U.S. Environmental Protection Agency (EPA) issued a final rule
recently that changes the definition of “heating oil” under the federal
Renewable Fuel Standard (RFS) program. This is good news for heating
oil dealers because the rule expands the uses under which renewable
heating oil blends qualify for RINS, which in turn can be bought, sold or
traded for cash on the open market.
The final rule was necessary because in the 2010 rule that expanded
the RFS to heating oil, the EPA used the term “home heating oil #1 and
#2” to describe fuel oil that qualified for RINS generation when
blended into renewable fuel. Inclusion of the word “home” suggested
that heating oil used to warm commercial and public buildings did not
qualify for RINS generation under the RFS, which was not EPA’s intent.
Limiting the type of heating oil to #1 and #2 fuel oil also prevented
new advanced or cellulosic renewable fuels that may be used to heat
buildings from qualifying for RINS.
Under the new definition of heating oil, RINS can now be generated
for advanced and cellulosic renewable fuels that may be used to heat
homes as well as public and commercial buildings. The expansion of
the definition of heating oil does not include fuel oils used to generate
process heat, power, or other functions. The fuel oil
must
be used to
generate heat to warm buildings or other facilities where people live,
work, recreate, or conduct other activities. The expanded definition of
heating oil will encourage the growth of renewable fuel production in
the heating oil market by adding value to renewable fuel oils through
the generation of RINs. In particular, the expanded definition could
spur the production of advanced or cellulosic biofuel, providing
additional opportunities for refiners to meet their annual RFS volume
obligations.
The final rule however, requires producers of these new renewable
heating oils to register with the EPA, file quarterly reports and certify
that they are used downstream for a qualified use that generates RINS.
The registration, reporting and downstream tracking requirement
does
not apply
to #1 or #2 fuel oil blends used for residential heating, so
renewable fuel producers and non- traditional heating oil dealers are
subject to registration reporting and tracking requirements.
