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Changes to Northeast US heating oil sulfur specifications

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), reductions in the maximum sulfur content of heating fuels in five northeastern states will likely result in higher demand for ultra low sulfur diesel (ULSD). On 1 July, New Jersey, Massachusetts, Connecticut, Vermont, and Rhode Island reduced the maximum allowable content of sulfur in heating oil to 500 parts per million (ppm) from 20 000 – 3000 ppm. It is expected that heating oil meeting the 500 ppm specification will be blended from higher sulfur heating oil and ULSD, which has a maximum sulfur content of 15 ppm. The 500 ppm sulfur limit for heating fuel is an interim step in most Northeast states’ plans to reduce the acceptable maximum sulfur levels to 15 ppm by mid-2016 (new Jersey) or during 2018.

The five Northeastern states adopting lower sulfur limits this year have used an average of 139 000 bpd of No. 2 heating oil during the past five winters, according to the EIA. Massachusetts and Connecticut, the largest consumers among the five states, average 42 000 bpd and 40 000 bpd, respectively over the past five winters. Demand typically peaks in January, with the January average demand for all five states combined over the past 5 years averaging 195 000 bpd. However, demand in the region has been declining, as existing homes that use heating oil for space heating convert to natural gas and as fewer new homes are built to use heating oil.

US refineries, as well as refineries in the Atlantic basin that supply distillates to the Northeast US, do not typically produce substantial volumes of 500 ppm sulfur specification distillate. In 2013, US refineries produced 146 000 bpd of distillate with sulfur content greater than 15 ppm but less than 500 ppm , almost all of which was produced in the Gulf Coast region. The East Coast (PADD 1) produced only 3000 bpd. ULSD was 90% of total US refinery net production of distillate in 2013.

As a result of the shortfall in refinery production of 500 ppm distillate, heating oil market participants in the Northeast will likely pursue one of several strategies. One option is to supply ULSD, which is used primarily as a transportation fuel, to meet heating oil demand.

US refineries produce substantial volumes of ULSD and the product is readily available in the New York Harbour area because of the sulfur specification for heating oil in New York was reduced to 15 ppm in 2012. Additionally, the New York Mercantile Exchange (Nymex) converted the standard heating oil futures contract to 15 ppm in May 2013. Thus, the Northeast has access to a fungible distillate product that can supply both home heating demand and transportation fuel demand and that does not require separate storage and handling facilities for the different fuels. However, because ULSD typically costs more than higher sulfur heating oil, homeowners could face higher prices to heat their homes.

A second option is to blend higher sulfur distillate with ULSD to produce 500 ppm heating oil. This option requires separate storage and handling facilities for the two fuels, but allows the blender to capture the price difference between higher priced ULSD and the lower price higher sulfur distillate. Based on a blend of 80% ULSD to 20% No. 2 heating oil, to meet the 500 ppm sulfur limit, blending the two fuels would yield a 2 cent/gal. average margin based on August spot prices in New York Harbor.

EIA explained that as winter approaches, inventories take on greater importance. With the change in the sulfur specification on the horizon, the sulfur level of distillate fuel in inventory in the converting states has changed. Before 2013, the percentage of distillate inventory in the converting states that was 500 ppm sulfur content or greater averaged over 70%. Ahead of July 2013, while the Nymex distillate specification changed to ULSD, the quality of distillate held in inventory began to shift.

Many of the bulk terminals qualified to deliver against the Nymex are located in New Jersey, and as a result much of the distillate inventory in New Jersey was converted to a lower sulfur specification in advance of the May 2013 contract deadline. As the 1 July, 2014 specification change approached, the share of distillate inventories the converting states with sulfur content under 15 ppm increased further.

The latest state level inventory data (June) show that low sulfur distillate now makes up 64% of total distillate inventories in the converting states, while distillate with a sulfur content greater than 500 ppm now only makes up to 35%. That higher sulfur distillate inventories have not dropped further is an indication that inventory holders in some states intend to blend. However, as a 15 ppm sulfur limit is planned in these states in 2016 and 2018, the share of distillate inventories with a sulfur content of less than 15 ppm is expected to continue to grow in the future. Only 1% of total distillate inventories in the converting states are of a distillate with sulfur content greater than 15 ppm but less than 500 ppm.

While the change in Northeast heating oil specification will likely increase demand for ULSD, the EIA holds that the increased low sulfur demand should easily be met through a combination of domestic refinery production and imports from the actively traded Atlantic Basin market.

Adapted from a press release by Emma McAleavey.

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