About Heating Oil (HO)

Distillation is the primary method of refining Crude Oil into Heating Oil. The crude oil is heated at the bottom of a tall metal tower. As the crude gets hotter, it turns to a gaseous state the vapors rise. As the vapors rise, they cool. Each Crude Oil by product, in its gaseous state has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions like fuel oils, and diesel fuel are taken from the bottom part of the heating tower. Lighter fractions like butane, gasoline, and kerosene are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products.

The six basic types of refined petroleum products are: jet fuel, kerosene, motor gasoline, diesel fuel, residual fuel, and distillate fuels. Heating Oil is the primary product of the distillate fuels, accounting for roughly forty-five percent of the total distillate fuels. As the name implies, the major use of distillate fuels, and Heating Oil, is used for heating purposes, primarily homes.

The supply of Heating Oil is directly related to the supply of Crude Oil, since Heating Oil is a product of refining Crude Oil. The supply or production of Heating Oil is best understood by breaking it down into two components: Crude Oil supply and available remaining supply of Heating Oil. The supply of Crude Oil is influenced by oil discoveries and technological advancements in drilling techniques. The advent of deep water oil drilling, as well as other technological advancements in oil findings, are important factors in considering the future supply of Crude Oil.

Available supply of heating oil is the amount Heating Oil already refined and ready to be used. The American Petroleum Institute releases oil supply numbers (or stocks) weekly. Most major papers present this information. When the available stocks are large, consumers and distributors have to rush to the market to meet causing prices tend to languish. When the stocks positions are low, consumers and distributors have trouble obtaining needed heating oil and will generally pay higher prices to meet their current needs.

Political considerations also play an important role in the available supply of heating oil. In 1973, the major Arab oil producing countries banded together to form a cartel to restrict the supply of Crude Oil on the world market to inflate the price. The Organization of Oil Exporting Countries (OPEC) has grown considerably since 1973, but its power has diminished greatly in recent years. NON-OPEC countries are producing more and more oil. OPEC, even in its slightly diminished capacity, is still the major political force in the oil production area. OPEC countries include: Saudi Arabia, Kuwait, United Arab Emirates, Algeria, Iran, Iraq, Libya, Qatar, Algeria, Ecuador, Gabon, Indonesia, Nigeria, and Venezuela.

The demand for Heating Oil is dependent on two main factors: weather, and consumer habits. Weather plays a critical role in the demand for Heating Oil. Extremely cold winters cause demand for Heating Oil to increase dramatically, resulting in sharp and powerful rallies in the futures market. Mild winters, of course, lead to lower demand for heating oil and sharp price declines are the result. Since Heating Oil is primarily used for residential heating purposes, consumers buying habits are also a very important component of the demand side of the equation. Consumers tend to stock up on Heating Oil during the mid summer to prepare for the impending winter months and cold weather. In the short run, consumers not change their heating habits in reaction to rising or falling prices, but over longer periods of time, consumers will switch to alternative forms of heating such as kerosene, wood, and natural gas.

The macro factors affecting demand for Crude Oil, also affect the demand for oil. These broad based factors are income levels, population growth and per capita income levels, exchange rates, and consumer attitudes concerning fuel usage.

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