Home Heating Oil Expenditures Projected to be Slightly Lower than Last Winter

In petroleum markets, October is typically the time when attention shifts to heating fuels. In its October 2013 Short-Term Energy and Winter Fuels Outlook, the U.S. Information Administration (EIA) is projecting the retail price of heating oil to average $3.68 per gallon this winter heating season (October 2013 — March 2014). This price would be 19 cents per gallon lower than the average price during the winter of 2012-13 and reflects EIA's lower price forecast for Brent crude oil, which petroleum product prices in the Northeast track, along with narrower crack spreads for distillate fuel.

The Northeast accounts for 80% of total U.S. oil use for space heating. EIA expects households heating primarily with heating oil to spend an average of $46 (2%) less this winter than last winter, reflecting a 5% decrease in retail prices and a 3% increase in consumption. However, relatively low inventory levels as a result of strong global demand for distillate fuel could contribute to price volatility if temperatures significantly below forecast levels result in higher demand.

The largest component of the price of heating oil is the cost of crude oil. This winter, EIA expects the price of Brent crude oil to average $105 per barrel ($2.50 per gallon), about $6 per barrel (14 cents per gallon) lower than last winter. The call on OPEC crude oil production and global inventories is projected to be almost 0.8 million barrels per day (bbl/d) lower year-over-year in the coming winter as a result of growing non-OPEC liquid fuels production. Over the last month, Brent prices have fallen from recent peaks after some crude oil production restarted in Libya and concerns over the conflict in Syria moderated.

Additionally, U.S. distillate crack spreads, the difference between wholesale heating oil and Brent crude prices, are projected to be 36 cents per gallon this winter, about 6 cents per gallon lower than last year. Importantly, refineries on the East Coast (PADD 1), the key market for heating oil, have been running at a high rate. As a result of these high refinery runs and efforts by refiners to increase distillate yields, distillate production has reached record levels in 2013.

With retail prices for heating oil lower, EIA expects households heating primarily with heating oil to spend an average of $46 (2%) less this winter than last winter, as a projected 3% increase in consumption partly offsets the forecast 5% decrease in prices. Although winter temperatures are expected to be similar to last winter nationally, weather in the Northeast is expected to be 3% colder than last winter. Reliance on heating oil is highest in the Northeast, where 25% of households depend on heating oil for space heating, compared with 6% of households nationally.

While U.S. distillate production is high and prices and expenditures are expected to be lower than last year, the global supply-demand balance for distillate fuels has created a price structure that has not encouraged inventory builds. Strong demand abroad for distillate fuel, particularly in Europe and Latin America, resulted in record levels of U.S. exports over the summer. That demand has pushed up prompt prices for distillate futures contracts, which have been trading at a persistent premium to those for delivery further in the future. For the week ending September 27, distillate inventories in the U.S. Northeast were 29.4 million barrels, about 17.3 million barrels (37%) below their five-year average level, but only 0.9 million barrels below end-of-September 2012 levels. Distillate inventories have historically been used to meet normal winter heating demand but are also an important source of supply when demand surges as a result of unexpected or extreme cold spells. The low distillate inventories could contribute to heating oil price volatility this winter.

The U.S. average retail price of regular gasoline decreased six cents to $3.37 per gallon as of October 7, 2013, 48 cents lower than last year at this time, and the third consecutive week where prices decreased in all regions of the nation. Both the Midwest and West Coast prices dropped seven cents, to $3.28 per gallon and $3.74 per gallon, respectively. Down a nickel, the East Coast and Gulf Coast prices were $3.36 per gallon and $3.13 per gallon, respectively. The Rocky Mountain region price was $3.51 per gallon, a decrease of four cents.

The national average diesel fuel price decreased two cents to $3.90 per gallon, 20 cents lower than last year at this time. Prices decreased in all regions of the nation for the second consecutive week. The Gulf Coast price lost three cents to $3.81 per gallon, while the East Coast, Midwest, and West Coast prices are all lower by two cents, to $3.91 per gallon, $3.88 per gallon, and $4.05 per gallon, respectively. The Rocky Mountain price was $3.92 per gallon, a penny lower than last week.

Total U.S. inventories of propane decreased by 0.5 million barrels last week to end at 66.5 million barrels, about 9.4 million barrels (12.4%) lower than the same week last year. Gulf Coast inventories led the decline by falling 0.5 million barrels. Rocky Mountain/West Coast stocks fell 0.1 million barrels and East Coast stocks were down slightly. Midwest propane inventories grew 0.1 million barrels. Propylene non-fuel-use inventories represented 4.5% of total propane inventories.

Beginning this week and continuing into mid-March 2014, prices for wholesale and residential heating oil and propane will be included in This Week In Petroleum, as well as in the Weekly Petroleum Status Report and on EIA's Heating Oil and Propane Update web page.

As of October 7, 2013, residential heating oil prices averaged $3.82 per gallon, which is 15 cents per gallon lower than last year during the same time frame. The average wholesale heating oil price for the start of the 2013-2014 heating season is $3.07 per gallon.