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Warm Winter Added Pressure on Heating Oil Prices

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Heating oil prices

In its Weekly Petroleum Status Report released on January 21, 2016, the EIA (US Energy Information Administration) reported that heating oil prices were at $2.17 per gallon on January 18, 2016, which represents a fall of $0.05 per gallon compared to prices for the previous week, ending January 11. Notably, heating oil prices on January 18, 2016, were $0.72 per gallon less than they were in the corresponding period last year, which represents a YoY (year-over-year) fall of nearly 25.5%.

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Heating oil prices by region

For the week ending December 18, East Coast residential heating oil prices fell by $0.05 per gallon, settling at $2.12 per gallon. Midwest heating oil prices also fell by $0.09 per gallon, settling at $1.68 per gallon.

Why heating oil prices are falling

In the preceding part of this series, we talked about how distillate inventories rose by 0.84 MMbpd for the week ending January 15, compared to the previous week. But demand is still 19% lower than the previous year’s demand, which has resulted in massive stockpiles. Over past two weeks, distillate inventories rose by around 12.5 MMbpd, which means lower demand and higher production levels.

Meanwhile, refineries have been operating at maximum utilization rates to gain from lower crude oil prices, but this has affected the prices of distillate fuels like heating oil. Even the rise distillate demand has not started supporting heating oil prices yet. Due to the mild weather so far this winter (prior to the current cold front), heating oil prices may continue to see a further downward trend in prices.

Increases in operational costs

The fall in the heating oil prices should increase operational costs, which should result in lower profitability for refineries such as Valero Energy Corporation (VLO), Marathon Petroleum Corporation (MPC), Holly Frontier (HFC), and Phillips 66 (PSX).

Falling production levels are also negative for MLPs (master limited partnerships) because lower production levels result in lower transport volumes, which decreases the revenues of MLPs like Phillips 66 Partners (PSXP), Valero Energy Partners (VLP), and MPLX (MPLX). Notably, Valero Energy (VLO) accounts for 6.7% of the iShares US Oil & Gas Exploration & Production ETF (IEO).

Now let’s talk about propane inventories and production for the week ending January 15.

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