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HEATINGOIL

Heating Oil

Major Characteristics

Heating oil and Diesel areclassified as distillate fuel oils and rank second behind gasoline as themost-consumed liquid fuels. While, diesel powers heavy construction equipment,trucks, buses, tractors, trains and automobiles, heating oil (often referred toas No. 2 fuel oil in US) is used in the central heating of homes and smallbuildings.

The main difference between thetwo fuels is that heating oil is allowed to contain more sulfur than dieselfuel. The US environment Protection Agency (EPA) stipulates that diesel usedfor transportation cannot have sulphur more than 500 ppm (parts per million).However, heating oil is not subject to such a mandate and it usually containsaround 2000 - 2500 ppm of sulphur.

It is estimated that in the US,approximately 12 gallons of distillate are produced from a 42-gallon barrel ofcrude oil. Of these 12 gallons of distillate, less than 2 gallons are heatingoil, and the other 10 are diesel fuel.

Diesel fuel requires additionalprocessing to remove sulfur and is therefore more costly to produce thanheating oil. Diesel fuel is often priced at a stable premium to the price ofheating oil as both are always produced together and are chemically similar.

As heating oil is derived from crudeoil, its price shows a high correlation with crude oil prices. Crude - HeatingOil crack is the margin refiners earn when they refine crude oil into variousproducts, especially heating oil, which varies between US $ 4 - 14 a barrel.

Global Scenario

World-over, residences andbusinesses are estimated to use about 10 billion gallons of heating oil eachyear. The US is the world s largest consumer of residential heating oil, withtotal consumption of residential heating oil in 2008 reported to be around 4.6billion gallons. Of the 111 million households in the United States,approximately 8 million use heating oil as their main heating fuel.

Globally, more than three-fourthsof the distillate sales, as diesel are for transportation and only a littlemore than 10% is used for residential heating.

US is the largest refiner ofcrude oil holding 20% of the total world refining capacity of 87,700 kilobarrels per calendar day, followed by China (8.9%), Former Soviet Union (8.8%),Japan (5.3%) and India (4.1%).

However, the production ofheating oil or diesel in any country depends on the type of economy it follows.For eg, while US has adopted a gasoline based economy, India is largely adiesel based economy, leading to more production and consumption of gasoline inUS and High-Speed Diesel (HSD) in India.

 

World Heating Oil Markets

Chicago Mercantile Exchange(CME), which has acquired New York Mercantile Exchange (NYMEX) andIntercontinental Exchange run heating oil derivative markets.

Indian Scenario

India only produces diesel, whichis designated as High Speed Diesel (HSD).

The growth of the Indian economyhas lead to increasing demand for energy for transportation and industry sincethe recent 10-15 years. As India is predominantly a diesel based economy, thedemand for diesel has been increasing at a quick pace.

India s consumption of High SpeedDiesel in 2008-09 is estimated to be 15.9 billion gallons in 2008-09, which isup by 30% from 2004-05 consumption of 12.2 billion gallons.

India s production of High SpeedDiesel has shown a sharp improvement in the previous two decades, aided by thesetting up of new refineries and increased capacity utilization. The productionof High Speed Diesel has increased from 5.3 billion gallons in 1990-91 to 19.4billion gallons in 2008-09, marking a 265% increase.

High Speed Diesel exports fromIndia have grown substantially, with it jumping from 2.6 billion gallons in2005-06 to 4.2 billion gallons in 2008-09, representing an increase of above60%, exposing the exporting Indian refineries to the huge volatility in globalprices.

The majority of refineries inIndia are state-owned and follow a steady pricing policy as per Governmentregulations. The major refiners include Indian Oil Corporation Ltd (IOCL),Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd(HPCL) and Reliance Industries Ltd (RIL). The RIL being a private playerexports most of its production of petroleum products.

Market Moving Factors

Globally, heating oil prices arehighly correlated with crude oil prices as cost of production of heating oilincludes the cost of crude oil used plus cost of refining, distribution andstorage.

Thus, all factors influencingcrude oil prices have a profound influence on heating oil prices too. Thesefactors include, supply-demand, global economic scenario, natural disasters,currency fluctuations, geo-political tensions, interest rates, prices of otherassets, commodities etc.

The demand for heating oil ishighly seasonal as residential-space heating is the primary application ofheating oil. Prices are normally observed to rise during the winter months,i.e. November - March.

The supply-demand scenario in US,is very important as US is the largest consumer, accounting for around 40% ofglobal consumption.

The prices are also influenced bythe fundamentals of diesel fuel, as both are very similar and producedtogether. Thus, when demand for on-highway diesel increases, refiners oftengenerate a greater proportion of diesel than heating oil from the distillatestream, and vice versa when heating oil demand increases.

The worldwide diesel demand isbeing propelled mainly by economic growth, particularly in developing nations,as well as a push in Europe to increase the usage of diesel vehicles. More thanhalf of European cars are fueled by diesel.

Storage also plays an importantrole in trade patterns and prices. When inventories are full, this readyavailability of large supplies drives down the price. In contrast, when stocksare relatively low, prices tend to increase. Disruptions in production due toextreme weather or other unforeseen events can also lead to prices picking up.

Measurement

1 US Barrel = 42 US Gallons

1 US Barrel = 158.98 litres

1 MT = 7.33 barrels

Note: Measurement of barrels pertonne vary from origin to origin

Source :- www.mcxindia.com

Web Resources On

www.eia.doe.gov

www.iea.org

www.petroleum.nic.in

www.bp.com

www.cmegroup.com

www.wtrg.com

www.futuresource.com

www.oilspace.com

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