Oil Market Report April, 2017

In February of each year, the great and good of the international oil world convene for London’s glamourous “IP” Oil Week (see our reports from Feb 2013 and Feb 2015). But there is another annual oil event that focuses on the “business end” of the market, with attendees coming from the equipment manufacturers, the transport suppliers and most of all, the Fuel Distributors, whose job it is to break up the huge volumes of oil traded internationally and then deliver it direct to the end-user. In short, FPS (Federation of Petroleum Suppliers) Expo (http://www.fpsshow.co.uk/) is for the people in the oil industry who get their hands dirty…

The origins of liquid Fuel Distribution started with the nationalisation of both the Coal and Electricity industries after the Second World War. This dual nationalisation effectively meant that both the buying and selling of coal was controlled by the Government and so many independently minded coal merchants started to look at other forms of energy. At about the same time, the increasingly powerful Oil Majors were on the look-out for wider distribution channels, particularly for their Fuel Oil production, which was largely seen as a waste bi-product of refining gasoline.

The realisation that Fuel Oil could be sold to a new breed of energy seller – intent on stealing market share from coal – stimulated a whole new industry, that this year will enjoy its 37th annual conference. Liverpool’s Exhibition Centre will host the event in May and to the outside world, this gleaming, new venue will generate for the sector a distinct aura of confidence. But today’s Fuel Oil industry is actually a mere shadow of the glory days of the 1970’s and 80’s, when King Coal’s “death by a thousand cuts” came to pass. Firstly Fuel Oil entirely eclipsed coal for the fuelling of ships and then soon after that, diesel and electric trains had replaced coal-reliant steam locomotion. Finally, it was the “dash for gas” which killed off coal for home heating and decimated the number of nationwide coal sellers. However, gas was only available in urban conurbations and so there were still thousands of rural properties unable to connect directly to the Gas Main. Step forward the Fuel Distributors once again, with their new, fangled Kerosene Heating Oil…

Fast forward to the modern day and it is this same product that forms the backbone of most Fuel Distributor operations, as they supply over 3bn litres of Heating Kerosene to almost 2m British households. The product itself is little changed from the 1970’s and is actually Jet Fuel, but with a lower Sulphur content (1% Sulphur for Heating Oil vs 3% Sulphur for Aviation). It is also still supplied to those properties that are “off-grid” and cannot therefore, use Natural Gas.

For the businesses involved, selling Kerosene remains a maddeningly seasonal affair with cold winters generating up to 50% spikes in monthly demand, whilst mild winters mean floored prices (good for the consumer of course) and delivery tankers that are parked up by Midday. And let’s not forget those fickle customers, who will often switch suppliers for as little as a 1 pence per litre saving. Even more problematic is reliable supply. Unlike the rest of Europe (and North America), which uses Gasoil for Heating Oil, Britain is unique in using Kerosene for heating, which effectively makes this grade a niche product and therefore potentially tricky to source. At 3bn litres per annum, Heating Kerosene only makes up 20% of the total Kerosene market in the UK, with the bulk of the volume (13bn litres) being Aviation Kerosene. This makes the Heating Oil sector reliant on refiners to keep producing the more expensive (because of its lower sulphur content) Heating Kerosene when it would be considerably easier just to sell Jet Fuel. This position is made even more precarious when you consider that 60% of Jet Fuel consumed in the UK is imported, which means that in theory, there is unlimited demand for UK produced Aviation Kerosene.

To date, only Exxon-Mobil has pulled the plug (in 2008) on the production of Heating Kerosene (preferring to solely focus on Aviation Kerosene), but for the other UK Refiners and Importers, margins clearly have to be better on Heating Kerosene than Aviation Kerosene – otherwise why bother selling it? Worse still is the fact that as the footprint of the gas grid expands annually, so the numbers of properties “off-grid” decreases and the available size of the market correspondingly diminishes. Volumes of Heating Kerosene have fallen year on year since 2000 (excluding the 2 extreme winters of 2010 and 2011) and this logically means that buying prices will have to further increase, in order to offset the volume loss.

So the headwinds against Heating Oil are already strong and may get even stronger if one listens to the “mood music” that predominates across Europe. Legislation towards Heating Oil is increasingly geared to reducing its place as a source of energy in the 21st Century. In 2013, Denmark banned heating oil in its entirety and other Scandinavian Countries have signalled their intent to follow suit. In the UK, the Government has heavily penalised Heating Oil within the Renewable Energy Directive, which indicates that at best, Westminster views this industry as nothing more than a “minority sport”. Or worse, is it a sign that this is an industry whose demise the Government is keen to hasten..?

All of which will probably not be discussed at FPS 2017, as new road-tankers are showcased, the woes of un-gritted roads are discussed and the bars of Liverpool hit hard. The question of how independent coal sellers fared in the 1970’s versus today’s equivalents may well be relevant, but the answer can wait for another day. As well as being fun, FPS Members tend to be a pragmatic lot who will no doubt be largely unconcerned with where their industry will be in 10 years’ time. In fact most of them will have more pressing items to deal with in the next 10 days, let alone worry about the next decade!