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The burning issue

There will be more crude oil flowing from the Middle East in the next few weeks, but that will not necessarily translate into immediate relief from high prices at the pump. And that is especially true...


There will be more crude oil flowing from the Middle East in the next few weeks, but that will not necessarily translate into immediate relief from high prices at the pump. And that is especially true at the diesel pump, according to petroleum industry analysts.

Saudi Arabia took the big oil companies and its partners in the Organization of Petroleum Exporting Countries (OPEC) by surprise last month with the announcement that it planned to boost its production of crude oil by 500,000 barrels a day to help meet world demand. The announcement came just weeks after OPEC agreed to boost its collective output by 708,000 barrels per day in response to complaints about high gasoline prices, primarily in North America.

The purpose of the move, according to Saudi Arabian oil minister Ali al-Naimi, was to reduce the price of crude on world markets by about 20 per cent, to a per-barrel price of about US $25, down from $30. As the world’s largest exporter of crude oil, Saudi Arabia was concerned that stubbornly high gasoline and fuel prices would hurt the long-term prospects of the petroleum market by forcing users to cut down on their consumption and encourage the use of alternative fuels.

According to petroleum industry analysts, the increase in crude supplies should translate into savings at the pump, but only if the savings are passed along by the oil refining companies.

“The price of diesel should be affected in the West, because prices there follow the price of crude,” says Ron Rosnak, an oil industry analyst with En-Pro International, an Oshawa, Ont.-based consulting company. “But prices in Ontario, Quebec and the Maritimes will follow the New York harbor commodity price of No. 2 fuel oil, which is already refined. So what you could have is an abundance of crude but a shortage of finished product, which could actually push the price of diesel up.”

In truth, says Rosnak, the oil companies have much bigger problems than the availability of crude. As reported last month in Truck News, inventories of diesel fuel and furnace oil – which are refined at the same time and from the same middle distillate – remain dangerously low, and the oil companies are running out of time to make up the shortfall.

“Overall inventories are about 46 per cent below last year’s levels at this time. And if they don’t start improving the situation now, they will have major supply problems in the fall,” Rosnak says. “The refineries are running full-tilt to produce gasoline right now because there is also a shortage of that and we are into vacation time. There is still some middle distillate being produced, but diesel fuel is also used to power some hydroelectric plants, which are busy producing power for air conditioning in the summer. So all of this goes against the building up of inventories.”

Another factor working against the stockpiling of inventories is the Strategic Heating Oil Reserve initiative recently announced by U.S. President Bill Clinton’s administration, says Tom Kloza, a petroleum industry analyst with New Jersey-based Oil Price Information Service. To avoid the heating oil supply problem caused last winter by a February cold snap in the U.S. Northeast, the federal government has pledged to establish a 2-million barrel heating oil reserve for the region.

“It creates another worry for the refining industry,” explains Kloza. “The presence of a reserve like that in the market actually disuades refineries from stockpiling heating oil. If there is a cold snap this winter, and the government decides to inject a large portion of the reserve into the marketplace to keep the price down, the value of all inventories would drop.”

Both Kloza and Rosnak believe diesel prices should remain relatively stable until fall, when an early cold snap could lead to a price spike if the inventory picture doesn’t change.

“It is still possible for the inventories to be built up, but there are some big hurdles to overcome,” Rosnak says.

Adds Kloza: “They still have time, but it is obviously not profitable to make heating oil and diesel fuel right now. Given the state of inventories right now, I would say a price spike this winter is becoming more of a likelihood every day. I only hope we’re not still talking about this at Thanksgiving.” n


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