Market tightness could be exacerbated by a regulatory change in New York state, which starting this heating season limits the sulfur content of home heating oil to 15 parts per million (ppm), matching the sulfur content limit for ultra-low sulfur diesel fuel (ULSD). This change results in an estimated additional 70,000 barrels per day (bbl/d) of ULSD demand on an annual basis, but in times of peak demand - such as during sustained cold temperatures - could be as high as 170,000 bbl/d (See EIA Northeast Refinery Study). The specification change also eliminates an equivalent amount of demand for high-sulfur heating oil, which is the specification currently used in other northeastern states. This demand shift could be significant because ULSD is less available globally than is high-sulfur distillate fuel and the major production center for ULSD is on the U.S. Gulf Coast.
Some factors could work to bring supplies to the Northeast as winter approaches. One is the late-September restart of Delta Air Lines' (Monroe Energy LLC) 185,000-bbl/d Trainer Refinery near Philadelphia, which had been idle for the past year. Some additional production could become available if other Northeast refineries increase runs in response to the current strong distillate margins. Additionally, the U.S. East Coast exported an average of 135,000 bbl/d of distillate fuel in 2012 through July. However, prices in the Northeast have recently risen compared with European markets. Heating oil in New York Harbor typically sells at a discount to similar fuel in northwest Europe, which prompts flows of distillate from the East Coast to Europe. But in recent weeks, that spread has flipped and New York Harbor distillate is selling at a small premium to European distillate. This change in price spreads could help keep some distillate in the domestic market. More supplies could also result from Colonial Pipeline's completion of a recent 55,000-bbl/d capacity expansion of a dedicated distillate pipeline from Houston, Texas, to Greensboro, North Carolina. Colonial is also expanding capacity by an additional 60,000-bbl/d from Greensboro to Linden, New Jersey, and that capacity could come online as early as the first quarter of 2013.
Besides factors unique to the distillate market, crude oil prices are a major determinant of heating oil prices. Brent spot prices are expected to average about $108 per barrel this winter, about 6 percent lower than last winter.