US utilities shun residual fuel oil in favor of gas

Houston (Platts)--11Jan2006

Sharp declines in natural gas prices in recent weeks have taken their
toll on utility demand for low-sulfur residual fuel oil in the US Atlantic and
Gulf coasts, pushing prices lower.

     On Tuesday, prices for spot USGC 1%S 6 API fuel oil were back to
$48.75/bbl, more than $10/bbl down from September's highs after hurricanes
Katrina and Rita knocked out most Gulf gas and oil production and idled most
Gulf refinery capacity. 

     Market sources said Louisiana utility Entergy opted to settle their term
deliveries financially rather than taking its 1%S deliveries due to cheaper
natural gas. A spokesman with the utility was not available for comment
Wednesday. 

     Florida Power and Light -- a large consumer of 1%S fuel oil barges from
the USGC and cargoes from the USAC -- was heard turning away up to two
cargoes and one to five barges of term 1%S fuel oil deliveries this month due
to lower natural gas prices, said market sources. An FP&L spokesman could not
be reached for comment.

     On the USAC fuel oil market, meanwhile, the combination of softer utility
demand, above-normal temperature and heavy imports have weighed
on spot prices for low sulfur grades. Prices for 0.7%S fuel oil cargoes on the
USAC were around $49/bbl Tuesday, also more than $10/bbl lower than October's
highs. 

     Prices for 0.7%S fuel oil -- the dominant utility grade in the USAC --
peaked Oct 25 to near $59.50/bbl amid strong utility demand and damage to the
crucial BORCO fuel oil terminal in the Bahamas after Hurricane Wilma in
October. 

     Natural gas supply fears after Katrina and Rita knocked down Gulf
production kept a floor under double-digit natural gas prices through the last
days of 2005. This kept natural gas prices at sharp premiums to 1%S fuel oil
on the USGC and 0.3%S, 0.7%S, and 1%S fuel oil on the USAC, encouraging
utilities to maximize fuel oil burns. 

     But the New Year started off with above-normal temperatures across the
country, and the weekly average cash price at Henry Hub fell about 8% to
$9.61/MMBtu in the first week of January, from $10.49/MMBtu in the final week
of December. As of Wednesday, Henry Hub cash sat in the low to
mid-$8.50s/MMBtu, nearly 20% lower than where it started the new year.

     The combination of returning production from the Gulf shut-ins
and mild temperatures kept more gas in storage than expected. In fact, the
market saw a rare winter net storage injection reported by the Energy
Information Administration last week, in the midst of withdrawal season.

     "People who bought baseload supply are actually having to sell it in the
day markets," a Northeast gas trader said. "There isn't any demand, and the
shorts are now longs."

     As longer range forecasts continue to call for a warmer-than-normal
winter in January for much of the country, including the Northeast, long-term
winter supply fears for both natural gas and residual fuel oil have largely
dissipated. 

     On Wednesday, the February NYMEX gas futures contract settled at
$9.238/MMBtu, down nearly 18% from $11.223/MMBtu, at the start of the prompt
month.

     "We've come down so far. The market thinks the winter is over," one Upper
Midwest gas trader said.

		--Suzanne LaFavers, suzanne_lafavers@platts.com
		--Sheetal Nasta, sheetal_nasta@platts.com

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