Heating oil and propane expenditures projected to be lower than last winter

The US Energy Information Administration (EIA) anticipates the retail price of heating oil to average US$ 3.63/gal. this winter heating season (October 2014 – March 2015), which would be US$ 0.25/gal. lower than the average price during the winter of 2013 – 2014. This lower heating oil price reflects EIA’s forecast for a lower Brent crude oil price. EIA projects the retail propane price during the winter heating season in the Midwest and Northeast to average US$ 0.62/gal. and US$ 0.18/gal. lower, respectively, than the winter 2013 – 2014 average.

The market for heating fuels is highly dependent on winter temperatures. East of the Rocky Mountains, where propane and oil use as heating fuels is concentrated, the latest forecast by the National Oceanic and Atmospheric Administration (NOAA) projects the upcoming winter to be warmer than the previous one. The Midwest is forecast to be 16% warmer the South 12% warmer, and the Northeast 11% warmer. The warmer winter weather forecast reflects a return to more historically normal temperatures after the severe cold of last winter. However, as last winter demonstrated, weather can be very unpredictable, and deviations from expectations can be significantly affect demand and prices for heating fuels.

Heating oil

As a result of lower projected retail prices and lower expected consumption, EIA expects households heating primarily with heating oil to spend an average of US$ 362 (15%) less this winter than last winter. However, weather and oil price volatility, the adequacy of inventories, and changes in fuel specifications to reduce sulfur content all contribute to uncertainty about this winter’s heating oil market. If temperatures are 10% colder than forecast on a heating degree day basis, EIA projects average expenditures will be US$ 124 lower and prices will be US$ 0.16/gal. lower than last winter.

Reliance on heating oil is highest in the Northeast, where approximately 23% of households depend on heating oil for space heating. Distillate inventories in this region (which include heating oil as well as diesel fuel) were 29.3 million bbls on 26 September, 15.9 million bbls below the five year average, but similar to levels last year during that week. In general, the global supply-demand balance for distillate fuels has created a price structure in the futures market that does not encourage building inventory even in advance of increased demand in the winter months.

Although relatively low inventory levels can contribute to price volatility, the Northeast is located in the actively traded Atlantic Basin market from which distillate fuel can be imported during periods of high demand. Last winter, when demand increased as a result of colder than normal temperatures, PADD 1 distillate fuel imports averaged 294 000 bpd from January through March, up from an average of 133 000 bpd during the three previous months. However, if severe weather in the Northeast coincides with severe weather in Europe, supplies in the Atlantic Basin could tighten significantly.

Propane

The highest share of households that use propane as a primarily winter heating fuel is the Midwest. Propane use for space heating is also significant in the Northeast. EIA expects households heating primarily with propane to spend less this winter, but the projected decrease varies across regions. EIA expects that houses heating with propane in the Midwest will spend an average US$ 767 (34%) less this winter than last, reflecting prices that are approximately 24% lower and consumption that is 13%. Households in the Northeast are expected to spend an average of  US$ 340 (13%) less this winter, with average prices that are approximately 5% lower and consumption that is 9% lower than last winter.

As of 26 September, propane inventories in the Midwest were 28 million bbls, slightly above the five year average and 3.7 million bbls higher than the same time last year.

Adapted from a press release by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/09102014/heating-oil-and-propane-expenditures-1381/