US Heating Oil Expenditures Forecast To Be Lower This Winter – Analysis

A forecast combination of warmer weather and lower crude oil prices is contributing to the lowest expected average residential heating oil expenditures in nine years for the winter heating season of 2015-16, which runs from October 1 through March 31.

The average household using heating oil is forecast to spend about $1,390 for heating bills during winter 2015-16, down $460 from last winter’s average expenditures (Figure 1, above). Forecast average expenditures provide a broad guide to changes compared with previous winter heating seasons, but fuel expenditures for each household are highly dependent on the size and efficiency of individual homes and their heating equipment, thermostat settings, and local weather conditions.

Heating oil is a winter fuel mainly used in the northeastern United States, where 23% of that region’s households use it as a primary space-heating fuel. Nationally, it is less widely used, with only 5% of households using it as their primary source of heat.

Prices for residential heating oil are forecast to average $2.57/gallon (gal) this winter, which would be 47 cents/gal (15%) less than last winter. The main driver of lower retail heating oil prices is lower crude oil prices. The spot price of North Sea Brent crude oil is forecast to average $52/barrel (b) this winter, down $13/b (32 cents/gal) from last winter. In the forecast, Brent prices remain at levels below recent years, as the global oil market continues to experience large inventory builds because of more supply than demand.

Consumption of heating oil is largely dependent on winter temperatures, which are forecast by the National Oceanic and Atmospheric Administration (NOAA) to be relatively mild this winter. Consequently, heating oil use is forecast to be 11% lower than last winter.

Also, distillate fuel inventories, both globally and in the Northeast, are ample heading into the winter. Slowing economic growth in emerging economies, which has been the major driver of distillate consumption in recent years, has reduced growth in global demand for distillate fuel. Additionally, relatively strong gasoline refining margins during the past summer encouraged record-high global refinery runs.

This combination of high refinery runs and slowing demand growth has resulted in high inventory levels in major distillate markets including Asia, northwest Europe, and the northeast United States. Distillate stocks in the Northeast totaled 45.1 million barrels on September 25, the highest for any week since late 2011. Higher levels of distillate supply compared with demand contribute to expected heating oil crack spreads averaging 38 cents/gal this winter, down from an average of 43 cents/gal over the previous three winters.

Although average expenditures for heating oil customers are expected to be lower this year, actual expenditures could deviate significantly from forecast values. For example, a cold winter could substantially increase expenditures for heating oil consumers. EIA runs a winter weather scenario that calculates what expenditures would be if temperatures are 10% colder than forecast. In this scenario, EIA projects that the average household using heating oil would spend $1,560 for heating bills during winter 2015-16, $170 more than in the base temperature case. However, even in 10% colder scenario, heating oil expenditures are forecast to be less than last winter’s average expenditures.

One of the main factors driving heating fuel expenditures this winter will be the price of crude oil. As the main cost for producing refined products, changes in crude oil costs can have a large effect on retail prices for heating oil. EIA forecasts that West Texas Intermediate crude oil prices in January will average $48/b.

However, the current values of futures and options contracts continue to suggest high uncertainty in the price outlook. WTI futures contracts for January 2016 delivery, traded during the five-day period ending October 1, averaged $46/b, while implied volatility averaged 43%. These levels established the lower and upper limits of the 95% confidence interval for the market’s expectations of monthly average WTI prices in January 2016 at $32/b and $67/b, respectively. While there is not sufficient liquidity in the Brent options market to do a similar calculation for Brent crude, based on EIA’s Brent-WTI forecast price differential, one could assume that the upper and lower limits of the confidence band for Brent would be roughly $5/b above those for WTI. Several factors could push prices lower or higher than forecast, including the pace of global economic growth, the responsiveness of non-OPEC oil production to the low price environment, and any unplanned production outages.

As the price of crude oil changes, prices of wholesale, and ultimately retail, heating oil adjust to reflect crude oil costs. All other factors being equal, a $1-per-barrel change in the price of crude oil will result in a change of 2.4 cents per gallon in the price of wholesale and retail heating oil.

U.S. average retail regular gasoline price decreases, average diesel fuel price increases

The U.S. average retail price of regular gasoline decreased less than a penny from the previous week to remain $2.32 per gallon on October 5, 2015, 98 cents per gallon lower than the same time last year. The Midwest and Gulf Coast prices increased three cents and two cents, respectively, to $2.35 per gallon and $2.04 per gallon, respectively. The Rocky Mountain price decreased six cents to $2.48 per gallon, while the West Coast price fell five cents to $2.79 per gallon. The East Coast price was down one cent to $2.17 per gallon.

The U.S. average diesel fuel price increased two cents from the week prior to $2.49 per gallon, $1.24 per gallon less than at the same time last year. The Midwest price increased six cents to $2.49 per gallon. The Rocky Mountain price increased two cents to $2.50 per gallon, and the West Coast price increased less than a penny to remain $2.69 per gallon. The Gulf Coast price was unchanged from the previous week and remained $2.32 per gallon. The East Coast price was down one cent to $2.52 per gallon.

Propane inventories gain

U.S. propane stocks increased by 1.6 million barrels last week to 100.3 million barrels as of October 2, 2015, 19.7 million barrels (24.4%) higher than a year ago. Gulf Coast inventories increased by 0.6 million barrels and Midwest inventories increased by 0.5 million barrels. East Coast inventories increased by 0.3 million barrels and Rocky Mountain/West Coast inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 4.4% of total propane inventories.

Residential heating fuel price survey begins this week

Beginning this week and continuing through the end of March 2016, prices for wholesale and residential heating oil and propane will be included in This Week in Petroleum, and on EIA’s Heating Oil and Propane Update web page.

As of October 5, 2015, residential heating oil prices averaged $2.41 per gallon, which is almost $1.11 per gallon lower than at the start of last heating season. The average wholesale heating oil price for the start of the 2015-2016 heating season is $1.63 per gallon, nearly $1.04 per gallon below the first week of the 2014-2015 heating season.

Residential propane prices entered the 2015-2016 heating season at an average of about $1.94 per gallon, nearly 44 cents per gallon lower than at the start of last winter’s heating season. Wholesale propane prices averaged nearly 59 cents per gallon, almost 54 cents per gallon lower than the first collection week in October last year.