One of the critical factors energy analysts focus on each fall, ahead of the rise in demand for heating fuels, is the pre-winter build-up of fuel inventories. This year, inventories are unusually high for all winter fuels, including distillates (which includes heating oil), natural gas, propane, and coal used for electricity generation. Current high inventories stem primarily from the recession. As the economic downturn deepened throughout 2008 and 2009, energy demand fell, but supply was relatively slow to respond. As a result, stocks of many fuels were pushed well above typical historical levels.

U.S. distillate inventories reflect, in part, worldwide petroleum markets, which experienced a mismatch between supply and demand in 2008 and 2009. Despite the recession, which began in the United States in December 2007 (according to the National Bureau of Economic Research), and sharply rising oil prices through July 2008, total world oil demand grew about 1.1 percent in the first half of 2008. However, world oil supply grew even more than demand, averaging 1.8 percent over the first half of 2008. World oil demand fell in the third and fourth quarters of 2008, but global oil supply did not actually drop from 2007 levels until the fourth quarter of 2008. Crude oil contango (when prompt month prices are lower than future prices) also encouraged extra stock building, which eventually overflowed into floating storage, as on-land tanks filled toward capacity.

In the United States, crude oil inventories stood at relatively low levels in mid-2008, but began a steady climb over the second half of the year as imports and production exceeded refinery throughput. U.S. crude oil stocks reached their highest 2009 level on May 1 at 375 million barrels, more than 14 percent above 5-year average levels for that time of year. That level represented over 3 days of supply more than average, and while crude oil stocks began a seasonal decline, inventories are still well above normal levels today.

Meanwhile, U.S. refinery production also ran ahead of demand, particularly for distillate fuels. During 2008, refiners shifted operations to produce more distillate fuel relative to gasoline than usual to take advantage of an attractive export market. In early 2009, U.S. refiners reduced crude runs as total petroleum demand continued to decline from 2008 levels. As gasoline demand picked up seasonally over the summer, refinery utilization also increased, pulling down some of the crude oil inventory surplus. While refiners avoided large gasoline stock builds over the summer, distillate inventories grew to unusually high levels, as domestic distillate demand fell much more than expected and much more sharply than gasoline. Further undermining still relatively high distillate yields, actual distillate export market opportunities in 2009 fell well below those seen in 2008.

As shown in Figure 1, the net result of these forces was a shift from relatively high U.S. crude oil inventories to very high distillate stocks, which bodes well for heating oil customers this winter. U.S. total distillate stocks for the week ending September 25, 2009 were 171 million barrels, which is 29 percent above the 5-year average level. As of July 2009 (the latest data available), middle distillate supply for the U.S. and European countries belonging to the Organization for Economic Cooperation and Development combined stood at almost 41 days supply, which is almost 9 days higher than the 5-year average for this time of year.

Figure 1. Surplus Days Supply Shifted from Crude Oil to Distillate Fuel Over 2009

Winter Fuels: How Inventories Are Stacking Up

Similarly, stocks of propane, natural gas, and coal have reached very high levels as demand fell much more than supply. Propane inventories have been running well above typical levels during 2009, and currently stand at 73 million barrels as of the week ending September 25, 2009, which is 14 percent above the 5-year average.

The latest U.S. storage report for natural gas shows storage at 3,525 billion cubic feet (Bcf) as of the week ending September 18, 2009, which is 16 percent above the 5-year average for this week. EIA projects U.S. storage will reach about 3,840 Bcf by the end of October, significantly exceeding the previous record end-of-month stock level of 3,565 billion cubic feet at the end of October 2007.

Coal stocks in the electric power sector reached a record high in June 2009 (the latest data available) at 198 million tons, up 29 percent compared to June 2008. The recession reduced industrial demand for electricity and, in turn, coal consumption at electric power plants. Coal-fired plants saw coal consumption drop 11 percent in the first half of 2009, compared to the first half of 2008. In addition, to the extent feasible, some utilities appear to be backing out some coal generation in favor of natural gas generation due to relatively low natural gas prices.

In total, fuel supplies are stacking up well ahead of winter–—a bright spot for consumers that, ironically, is due in large measure to the recession.