NEFI Update on Developing Winter Fuel Supply Crisis

“The industry is facing supply and price disruptions at a level we have never seen before,” Sean Cota, president and CEO of the National Energy & Fuels Institute, writes in a NEFI Update to members. “If we have warmer than average weather throughout the season, while tight, the market will be adequately supplied. However, we need to plan for the potential for colder than expected weather, especially prolonged cold snaps.”

NEFI and its state and local association partners are in frequent communication with government officials and fuel suppliers to identify ways to address the tight market, Cota writes in the Nov. 10 Update.

Advising fuel markets to avoid negative comments, Cota advises, “Maintain calm, focus on the steps you are taking to manage costs and supplies, and promote consumer energy conservation.”

Noting that supply issues have been building for months, Cota says the elements impacting the industry include:

• Recent announcement that 15 million barrels will be released from the Strategic Petroleum Reserve, bringing it to less than 50% of its 5-year average storage;
• OPEC+ production cuts that effectively amount to one million barrels per day;
• The December 5 implementation of the European Union/United Kingdom embargo on Russian oil and possible in-kind Russian retaliation;
• Trillions of dollars’ worth of margin call bailouts in Europe that are causing severe and persistent backwardation in the futures markets;
• Record low Northeast distillate inventories;
• Current lack of wholesale forwards, fixed differentials and supply agreements;
• Record and sustained Northeast basis blowouts for heating oil;
• Kerosene shortages throughout the Northeast;
• Possible U.S. freight rail strike on December 9;
• World tanker shipping shortage and doubling of transportation times;
• Low inventories for New York and New England power generators, leading to the real risk that they will turn to heating oil in the event of a prolonged cold snap;
• Potential utility fuel shortages which have caused grid operators to plan for rolling blackouts this winter.

NEFI has been in frequent contact with the administration, federal agencies including the Department of Energy, and members of Congress about the situation, to discuss policies that could provide possible short-term relief, Cota says. “We have also told politicians that conversations will eventually be needed regarding long-term solutions to bolster energy security in the Northeast and Mid-Atlantic.” He adds, “While there are no immediate silver bullet solutions to the current situation, some of our recommendations and actions include:

• Create a separate LIHEAP Contingency Fund of $500 million, in addition to the $1 billion supplemental recently passed by Congress, for targeted relief to states and localities this winter;
• Issue a Jones Act waiver to facilitate heating fuel shipments in advance of and through the duration of the heating season for PADDs 1a and 1b;
• Prepare the 36-hour supply of product from the Northeast Home Heating Oil Reserve for a possible release in the event of an emergency this winter;
• Limit any release from the heating oil reserve to delivery in the Northeast and Mid-Atlantic, while prohibiting its export out of the U.S.;
• Requesting Congress and the administration approve possible loan guarantees for the industry due to its increased cash flow needs;

“Relevant Congressional committees are already investigating possible trading loopholes and their impacts on the futures market in response to NEFI’s requests,” Cota reports.

This NEFI Update has been slightly edited.