In this article, we are going to deal with different raw materials that are sources of energy, such as natural gas, heating diesel and gasoline. Gasoline and heating diesel belong both to the category of distillation, or distillate, while natural gas is a raw material that is extracted by drilling the deposits located next to the oil reserves.
What are the energies?
The term energy, when it is related to trading, serves to describe the raw materials that can be used to obtain energy.
What are distillates?
Heating oil and gasoline are both obtained by distillation, which is a process in which the oil is heated and the resulting gases are then cooled to specific temperatures. The temperature at which the gases cool down will determine how energy is produced.
In this they differ from natural gas, which does not need any distillation and is found naturally in the subsoil. It is important to keep in mind that all these resources are finite and that one day they will be depleted.
Heating oil and natural gas are used to heat homes and buildings. Heating diesel, also known as fuel oil or diesel, is a product derived from crude oil. Many owners prefer heating oil as their main source of heat because it is safe and is usually cheaper than other fuels.
In the US In the US, the largest consumer, approximately 78% of households in the Northeast use heating oil. That is equivalent to about 7.5% of the country’s households, a market that is not negligible! Heating oil is burned in a furnace to generate heat, and is used in regions where natural gas infrastructures are not connected to homes or commercial buildings.
In comparison, natural gas is the most common heating energy and is connected to most homes through direct pipes. After being extracted from the subsoil, natural gas is treated to separate it into liquids and gases that can be transported throughout the world (in liquid form) and nationwide through pipelines.
It must then be processed in specialized plants to ensure that it meets the quality specifications. It is an extremely complex and expensive process, and any disturbance in its processing affects the price. Natural gas also has other uses in addition to heating, including the generation of electricity and cooking in gas ovens.
This means that while heating oil is subject to strong seasonal demand, natural gas remains constant throughout the year. It is estimated that up to 25% of energy consumption in the USA. UU. It comes from natural gas.
Gasoline is similar to heating oil in the sense that it is also a product derived from crude oil used to feed machinery, especially cars. Gasoline is consumed worldwide. It should be noted that there are other distillate markets apart from heating oil and gasoline, including kerosene, jet fuel and diesel, among others.
Although these markets are much smaller than that of gasoline and heating oil, as operators, we must also follow them if we operate with distillates, since they have important mutual correlations.
Factors linked to supply and demand
When operating with energy, it should be remembered that the prices of heating oil, gasoline and natural gas are determined by factors linked to supply and demand and are intrinsically linked to the price of crude oil.
The two main distilled energies are closely correlated since, the more one is produced from one of them, the lower the supply of the other. This is because the more crude oil is used to produce gasoline, for example, the less crude oil will be available to obtain heating oil. This reduction in supply would therefore lead to an increase in the price of heating oil.
And the same happens in the opposite direction. If the production of a distillate goes down, the production of others is more likely to increase. An example of this materialized after the terrorist attacks of September 11, 2001. Due to the closure of airports and lower energy demand by the aviation sector, distillate producers decided to distill less fuel for airplanes and produce diesel of heating in place.
This resulted in a sudden increase in supply and, consequently, a decrease in the price of heating diesel. This shows that distilled energies not only have an important correlation with each other, but also with the price of crude.
Another factor that must be taken into account when operating with distillates is seasonal demand. Since heating diesel is mainly used to heat homes and buildings, its market is very seasonal and its prices depend heavily on winter weather. When winters are especially raw or cold, demand increases and, therefore, prices rise. However, a mild winter will lower demand and, with it, prices. Therefore, those who wish to operate with heating oil should pay close attention to weather patterns to determine their potential consumption.
Although natural gas is also used as heating fuel, its seasonality is different. This is due to the fact that the demand increases during the winter when heating is used the most, but also increases in the summer months due to the higher electricity consumption, especially in the USA. UU., Due to the use of air conditioners.
Gasoline is another seasonal market, but it is very different from heating oil and natural gas. During the winter months, when the demand for heating diesel increases, the demand for gasoline usually drops. Usually, the cold does not invite long trips by car, which lowers the demand for gasoline.
However, during the summer, its demand increases due to the greater use of cars. Anyone operating with energies should pay attention to this inverse correlation.
The price of heating oil and gasoline is influenced by factors linked to the supply and demand that affect oil. If OPEC announced a decrease in production, this would mean a reduction in the availability to distill heating oil and gasoline.
For this reason, the price of distillates closely follows that of crude oil and, when operating with distillates, factors that affect the price of this must also be taken into account.
Gasoline is usually the most expensive distilled energy since it is not only more expensive to produce, but also records the world’s greatest demand.
As operators, the most important data regarding the supply and demand of heating oil and gasoline are published together with the data of crude oil every Wednesday in the inventories of the Department of Energy. This is an important publication that affects the markets, as it makes known the reserves of crude oil and other distilled energies.
Similar to crude oil, an increase in heating oil or gasoline reserves would lead to a drop in the market price, as it would indicate a decrease in consumption or an increase in supply. However, a decrease in reserves would lead to an increase in prices as an indication of higher consumption or a contraction in supply.
The main data related to the supply and demand of natural gas can be found in the Natural Gas Storage Reports published every Thursday by the Department of Energy. They detail the net changes in natural gas storage levels, which are broken down into three regions: east / Midwest (the main consumers), the south (the main producers) and the west.
- Gasoline and heating diesel are crude oil products that are formed during the distillation process.
- Natural gas is not a distilled product, but is usually found next to oil reserves.
- Both natural gas and distillates present seasonal markets closely correlated with the price of crude oil. Therefore, its price will be conditioned by the factors linked to supply and demand that influence the price of crude.
- There is an intimate correlation between the price of all distillates, since the greater the demand of one of them, the lower the supply of others.
- The main reports are the figures of the inventories published by the Department of Energy on Wednesdays and Thursdays and which disclose the reserves of distillates and, separately, natural gas.