OPEC Output to Remain Steady; Heating Oil Prices Lifted by Expected Rise in Diesel Demand

Posted by admin on August 11, 2009 at 11:59 am

Traders' expectations of an uptick in diesel demand in the near future drove up heating oil prices last week. (image: Todd Klassy via flickr.com)

OPEC’s president announced yesterday that he was content with current oil prices, which are holding steady at around $70 a barrel. With his endorsement of oil prices being “not bad,” quotas are expected to remain unchanged at a Sept 9 OPEC meeting to review production targets, Bloomberg reported on Monday.

As the producer of 40 percent of global oil supplies, the Organization of Petroleum Exporting Countries is a massive force in the oil industry.  When the cartel raises supply, prices plummet, and when it withholds production, prices go up. The announcement of their intention to keep the recent status quo likely means that crude oil prices will hold steady for the next few months.

For heating oil consumers, however, that’s only part of the story. While heating oil and crude oil prices often run along the same lines, that’s not always the case. Reuters reported Monday:

heating oil futures remained the leader to the upside for the energy complex…heating oil has benefited from a contango market structure coming out of summer and hope that economic recovery will boost diesel demand going forward.

This essentially means that heating oil prices could be on the rise, based on the impending cold weather, and the possibility of a recovering economy.

An economic recovery is significant for the same reason that crude oil and heating oil sometimes react differently to the market. First, it is important to note that heating oil and diesel fuel have essentially the same chemical makeup, and are therefore intrinsically linked. Since diesel fuel is what powers commercial trucks and ships, a more robust economy would lead to more companies shipping goods, which would lead to an increased demand for diesel fuel, and would in turn lead to higher prices for both diesel fuel and heating oil.

Although crude and heating oil prices are on the decline as of this writing, the increase in heating oil prices seen last week (while crude prices dropped) is attributable to its connection to diesel and expectations of economic recovery.