Worcester, Mass. – Heating oil buyers in Massachusetts, Vermont, New Jersey, Rhode Island and Connecticut are expected to see a significantly higher price on July 1, following the planned switch to the new 500-ppm maximum sulfur content heating oil from 2,000 ppm high-sulfur heating oil, according to some major heating oil suppliers.
Suppliers speaking on the sidelines of last week’s New England Institute Visions conference in Worcester told OPIS that heating oil prices in the five states would jump by about 7cts/gal on July 1, based on last week’s price gap of about 8cts/gal between ULSD and No. 2 heating oil. It is noted that the estimated price jump could vary on July 1, based on the actual price spread on that day.
While the blending cost of the new 500-ppm heating oil should translate to higher street prices, Northeast refiners may trigger a price war as they could hold a price advantage over non-refining suppliers.
Refiners may absorb all or most of the blending cost spike due to their refining economics. The higher blending cost could be factored into their refineries’ overall strong margins instead of passing it onto buyers.
Some refiners offering a substantially lower sulfur content fuel than the 500-ppm requirement, such as ULSD, may be perceived as leaving a lot of money on the table due to the currently wide hi-lo spread. However, this may also not be the case, as refiners have the flexibility to eat the “perceived higher blending cost” by adding that cost to their refining margins.
Currently, marketers who plan to supply ULSD are losing only about a penny per gallon, based on a 8cts/gal spread. Those supplying 500-ppm heating oil could have a substantial price advantage over those supplying 15-ppm fuel if the spread blows out to 30cts/gal as seen in January 2014.
In theory, the 500-ppm heating oil could be blended with about 80% of ULSD and 20% of No. 2 heating oil, helping to put an estimate on the price tag of the non-existent fuel. Based on a spread of 8cts, 500-ppm heating oil is nationally priced at about 7cts/gal over No. 2 heating oil or a penny discount to ULSD.
With just a few weeks to go, no suppliers or refiners are offering a new 500-ppm blend, but all suppliers said that they will comply with the more stringent requirement by July 1. In addition, physical trading in 500-ppm material has yet to emerge in the New York Harbor or New England markets.
Suppliers said that heating oil buyers may get 15-ppm to 500-ppm sulfur content fuel in July. However, some players maintain that a significant price spread would incentivize blending of the new 500-ppm boutique fuel.
The decision to supply either grade to meet the new mandate will depend on the price spread between No. 2 heating oil and ULSD next winter. A spread as narrow as that seen last winter (December-February) would effectively eliminate the blending margin for a new 500-ppm heating oil grade.
However, it is noted that the price spread or margin for next winter is unpredictable. Some suppliers also expressed concerns about securing a stable supply of high-sulfur heating oil in the five states and possible logistics issues due to the state sulfur cut.
Trading volume for heating oil in the off-peak summer months is significantly lower than in the peak winter season. It is also possible for suppliers and refiners to deliver pre-blended 500-ppm barges from New York Harbor to New England when demand picks up later this year.