This is an excerpt from a lengthy report on the rise in fuel prices from the US Energy Information Administration. This is the first official briefing that mentions unspecified refinery problems as contibuting to the problem. Embedded systems problems at refineries and in pipelines (and resulting supply problems) were among chief y2k concerns prior to roll over:

EIA

01-24-2000

What is causing the distillate price runups in the Northeast?

New York Harbor spot prices closed on Friday, January 21, at over $1.26. This was 50 cents higher than the previous Friday. Gulf Coast prices were only at $0.83, indicating the problem is largely limited to the Northeast. Retail diesel prices reported Monday January 24 were up 31-35 cents over last Monday in the Mid Atlantic and New England areas. But they were only up 7 cents in the Midwest.

Low stocks, weather, and supply problems combined to create the price surge in the Northeast. Last week, weather in New England was nearly 20% colder than normal for this time of year. The cold weather not only increased demand, but also caused supply problems, with frozen rivers and high winds hindering the arrival of new supply. This cold weather on top of low stocks was pushing prices up, with the forecast for temperatures to remain below normal in the Northeast until early February. It was reported that utilities were buying distillate for peaking power and to substitute for interruptible natural gas supplies, adding to the market pressure. Finally, refinery outages at the end of the week sent more buyers into the market as local supplies were temporarily drained, and prices spiked.

Keep in mind, that up until last week, distillate prices had been increasing over last winter, mainly as a result of crude oil price increases. Crude oil rose about 36 cents per gallon from its low point in mid February 1999 to the middle of January 2000 before the price spike. Over this same time period, New York Harbor spot heating oil had risen about 42 cents per gallon, reflecting both the crude price rise and a return to a more usual seasonal spread over the price of crude oil.

Q&A's on the Recent Distillate Price Increase

How might the distillate problem in the Northeast be resolved?

The current high prices in the Northeast should prompt increased production soon. Regional stocks will shift to areas of highest need, production from East Coast and Gulf Coast refineries will increase (capacity is available to produce more distillate), and if the problem persists, increased imports might be drawn to U.S. We can expect the situation to be resolved fairly quickly, in perhaps 1-2 weeks.

But there are several caveats as to the quickness of the price response:

 Colder weather will quickly use up additional supply moving into the area, postponing relief for the price spike;  Further refinery problems and/or long delays in current East Coast refinery recoveries will slow new supply from arriving.

Once the current price spike is relieved, we are not out of the woods. Stocks are likely to remain low for the rest of the winter, and we could see more price volatility before the cold weather has passed.

However, even when the current price spike is resolved, high crude oil prices will keep heating oil prices much higher than they were last year. PADD 1 (East Coast) retail prices last week at $1.21 were more indicative of the market before the latest crude oil price surge and did not reflect any impact from the spike. Yet they were 33 cents higher than prices the same time last year as a result of the high crude oil prices. While it has been suggested that the Strategic Petroleum Reserve (SPR) be used to remedy this distillate price runup, it would not do much to relieve the distillate squeeze that is occurring. An SPR release might ease crude prices briefly, but the recent large increase in distillate prices was mainly due to lack of distillate product, which the SPR would not resolve.

Link to story:

http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/distillate_market_briefing/sld009.htm

-- Carl Jenkins (Somewherepress@aol.com), January 28, 2000

Answers

http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/distil late_market_briefing/sld010.htm

This URL is the last slide from the DOE briefing on why the NorthEast has shortages and high prices of home heating oil, diesel, and kerosene (aka distillates). The entire briefing is interesting and not very long (11 pages). Here's a quote at the end:

"While it has been suggested that the Strategic Petroleum Reserve (SPR) be used to remedy this distillate price runup, it would not do much to relieve the distillate squeeze that is occurring. An SPR release might ease crude prices briefly, but the recent large increase in distillate prices was mainly due to lack of distillate product, which the SPR would not resolve. "

This seems to confirm that the problem is not lack of crude oil, but the lack of distillate product (ie diesel, home heating oil, kerosene. Earlier quote mentions further risk continues if there are more refinery problems or the existing problems are not fixed soon. So although the briefing emphasizes the increased price of crude and the OPEC cut backs plus the weather as causing the high prices and low supply, it seems that adding SPR crude would not solve the problem. Hence the real problem seems to be the refinery outages.

SO why aren't they analyzing why there are so many refinery outages?

-- slza (slzattas@erols.com), January 29, 2000.