Morning Futures Roundup

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Heating Oil Supplies May Tighten as East Coast Refineries Shut Production


   Fundamentals

There is a fundamental shift in the refining industry that may be signaling much higher Heating Oil prices for the East Coast of the US in the coming months. East Coast refineries are closing at an alarming rate, as a perfect storm of high input costs, increased environmental regulation, and weakening industrial and consumer demand for refined products has made refining operations an unprofitable endeavor.

East Coast refineries are unable to take advantage of the huge supplies of Crude Oil being sent from Canada to the Midwest storage facilities, which has been a main catalyst for the discounted prices for the benchmark WTI futures contract vs. the Brent futures contract, which is the basis for the Crude available to the East Coast market.
This pricy feedstock has crimped refining margins on the coast, especially with US Gasoline and distillate demand weak due to the slowdown in economic recovery.

If this was not enough bad news for refiners, New York State, which is the largest consumer of Heating Oil, will begin requiring sharply lower sulfur content of 15 ppm, vs. the current 2,000 ppm limit. Most, if not all, of the east coast refinery operations will not be able to produce Heating Oil with sulfur content that low by the July 2012 deadline, which will lead to reduced supplies and potentially sharply higher Heating Oil prices in New York. Gasoline margins on the east coast are running at barely breakeven levels when transportation costs are included.

Should we see a continued shut-down of the east coast refining industry, the region will likely become more reliant on supplies from the Colonial pipeline, which supplies refined products from the Gulf of Mexico up through the mid-Atlantic States. This could cause increased volatility in product prices, as dependence on only one major source of fuel leaves the area vulnerable to any issues involving the pipeline.




   Technical Notes

Looking at the daily continuation chart for Heating Oil, we notice the market has been in a general down-move since April, when the recent highs were made. Prices are below both the 20and 200-day moving averages, though Thursday's sharp rally in the Oil complex has prices beginning to test the 20-day average. The 14-day RSI has turned up, moving into neutral territory with a current reading of 47.52. There appears to be good support in the lead month futures near the 2.7000 area, with overhead resistance found at the 200-day moving average currently near the 2.9350 area.

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