Regional Prices Solve an Imbalance

During a severely cold winter in the U.S. Northeast, demand for heating oil soars.  To satisfy the unexpected demand, suppliers begin shopping for incremental supplies, first to the nearest re-distribution center, probably New York Harbor.  Market participants quickly see that if they can secure additional supplies, they can sell them.  To secure those supplies, they must outbid others -- others in Europe, for instance.  It quickly becomes clear that participants in New York Harbor are willing to pay a premium, and are doing so.  Suppliers in Europe respond by selling their supplies in New York rather than in local markets.  As those new supplies arrive in the northeastern United States and are delivered, the unusual demand is satisfied.  Marketers no longer need extra supplies, and are thus unwilling to pay a premium.  While the rising spot price indicated the need for new supply, the falling price shows that the need is satisfied.

The year 2000 witnessed several sharp price spikes, including Northeastern heating oil prices in January and February, and Midwestern gasoline prices in May and June.  The Energy Information Administration has published analyses and testimony on these events, including the chain of events that triggered the spikes and the market adjustments that brought prices down.  (See links.)