- Heating oil and
Diesel are classified as distillate fuel oils and rank second behind
gasoline as the most-consumed liquid fuels. While, diesel powers heavy
construction equipment, trucks, buses, tractors, trains and
automobiles, heating oil (often referred to as No. 2 fuel oil in US)
is used in the central heating of homes and small buildings.
- The main difference
between the two fuels is that heating oil is allowed to contain more
sulfur than diesel fuel. The US environment Protection Agency (EPA)
stipulates that diesel used for transportation cannot have sulphur
more than 500 ppm (parts per million). However, heating oil is not
subject to such a mandate and it usually contains around 2000 - 2500 ppm
- It is estimated that
in the US, approximately 12 gallons of distillate are produced from a
42-gallon barrel of crude oil. Of these 12 gallons of distillate, less
than 2 gallons are heating oil, and the other 10 are diesel fuel.
- Diesel fuel requires
additional processing to remove sulfur and is therefore more costly to
produce than heating oil. Diesel fuel is often priced at a stable
premium to the price of heating oil as both are always produced
together and are chemically similar.
- As heating oil is
derived from crude oil, its price shows a high correlation with crude
oil prices. Crude - Heating Oil crack is the margin refiners earn when
they refine crude oil into various products, especially heating oil,
which varies between US $ 4 - 14 a barrel.
residences and businesses are estimated to use about 10 billion
gallons of heating oil each year. The US is the world's largest
consumer of residential heating oil, with total consumption of
residential heating oil in 2008 reported to be around 4.6 billion
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-fourths of the distillate sales, as diesel are for
transportation and only a little more than 10% is used for residential
- US is the largest
refiner of crude oil holding 20% of the total world refining capacity
of 87,700 kilo barrels per calendar day, followed by China (8.9%),
Former Soviet Union (8.8%), Japan (5.3%) and India (4.1%).
- However, the
production of heating 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 a diesel based economy, leading to more
production and consumption of gasoline in US and High-Speed Diesel
(HSD) in India.
World Heating Oil Markets
Chicago Mercantile Exchange (CME), which has acquired
New York Mercantile Exchange (NYMEX) and Intercontinental Exchange run heating
oil derivative markets.
- India only produces
diesel, which is designated as High Speed Diesel (HSD).
- The growth of the
Indian economy has lead to increasing demand for energy for
transportation and industry since the recent 10-15 years. As India is
predominantly a diesel based economy, the demand for diesel has been
increasing at a quick pace.
- India's consumption
of High Speed Diesel in 2008-09 is estimated to be 15.9 billion
gallons in 2008-09, which is up by 30% from 2004-05 consumption of
12.2 billion gallons.
- India's production
of High Speed Diesel has shown a sharp improvement in the previous two
decades, aided by the setting up of new refineries and increased
capacity utilization. The production of High Speed Diesel has
increased from 5.3 billion gallons in 1990-91 to 19.4 billion gallons
in 2008-09, marking a 265% increase.
- High Speed Diesel
exports from India have grown substantially, with it jumping from 2.6
billion gallons in 2005-06 to 4.2 billion gallons in 2008-09,
representing an increase of above 60%, exposing the exporting Indian
refineries to the huge volatility in global prices.
- The majority of
refineries in India are state-owned and follow a steady pricing policy
as per Government regulations. 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 player exports most of its production
of petroleum products.
Market Moving Factors
- Globally, heating
oil prices are highly correlated with crude oil prices as cost of
production of heating oil includes the cost of crude oil used plus
cost of refining, distribution and storage.
- Thus, all factors
influencing crude oil prices have a profound influence on heating oil
prices too. These factors include, supply-demand, global economic
scenario, natural disasters, currency fluctuations, geo-political
tensions, interest rates, prices of other assets, commodities etc.
- The demand for
heating oil is highly seasonal as residential-space heating is the
primary application of heating 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% of global consumption.
- The prices are also
influenced by the fundamentals of diesel fuel, as both are very
similar and produced together. Thus, when demand for on-highway diesel
increases, refiners often generate a greater proportion of diesel than
heating oil from the distillate stream, and vice versa when heating
oil demand increases.
- The worldwide diesel
demand is being propelled mainly by economic growth, particularly in
developing nations, as well as a push in Europe to increase the usage
of diesel vehicles. More than half of European cars are fueled by
- Storage also plays
an important role in trade patterns and prices. When inventories are
full, this ready availability of large supplies drives down the price.
In contrast, when stocks are relatively low, prices tend to increase.
Disruptions in production due to extreme weather or other unforeseen
events can also lead to prices picking up.
1 US Barrel = 42 US Gallons
1 US Barrel = 158.98 litres
1 MT = 7.33 barrels
Note: Measurement of barrels per tonne
vary from origin to origin