This report is a summary of the US outlook for demand, supply, and prices for key US winter heating fuels: natural gas, heating oil, and propane. It is based on forecast results obtained for the US Energy Information Administration's October 2002 Short-Term Energy Outlook plus additional special scenarios generated for this report.
Tighter world oil markets and the resulting higher crude oil prices will result in higher relative fuel oil prices this winter (October-March), compared with last year's expenses, EIA reported in its 2002-03 Winter Fuel Outlook.
In addition, EIA reported, the general likelihood of a normal winter vs. last year's warmer-than-normal winter will result in higher demand for heating fuels in most areas of the US, except for warmer temperatures in key regions due to El Niño. The impact of both is expected to greatly increase household fuel expenditures. Increases in household fuel bills could rise as much as 45% for heating oil in some regions, 19% for natural gas, and 22% for propane (Table 1).
At the same time, heating fuel inventory levels should be adequate, except for distillate, minimizing the risk of even higher cost increases that could result from colder-than-normal weather in some areas. Midwinter distillate stock levels should deteriorate relative to normal, posing a risk of higher prices for distillate customers if weather turns colder than normal.
Overall, except for the West region and excluding the El Niño factor, the chances of household winter heating expenditures rising by at least 10% this winter are greater than 90% for most of the country. Nonetheless, EIA said, expenditures should still be well below the very high levels seen 2 years ago.
Residential heating oil prices could be up about 22% from last winter, if weather is normal. Smaller price increases (6-9%) are expected for natural gas and propane. Residential electricity prices, which nationally have remained fairly stable over the last few years, are not expected to change materially.
Nationally, heating degree-days would be up about 12% compared with last winter, if normal weather conditions prevail, but up 19% in the Northeast, where the preponderance of total US heating oil demand occurs.
Average prices of the major heating fuels are projected to be higher than last winter's because of higher crude oil costs stemming from the Organization of Petroleum Exporting Countries's production controls; slightly higher refinery marginal costs resulting from the requirements of a normal winter, compared with last year's mild season; and higher natural gas wellhead prices triggered by less drilling activity earlier this year, expanded demand by power generation facilities, and a recovery of industrial demand projected to accelerate during the winter season.
In late September, working gas storage was about 3,058 bcf—114 bcf higher than last year and the highest in 11 years. Propane stocks are estimated at 71.5 million bbl—4.5 million bbl higher than last year and the highest level in 4 years. Imports play an important, but secondary, role in meeting demand, EIA said.
Beginning-of-season heating oil stocks are estimated to be 130 million bbl—3 million higher than those of the previous winter but in the lower half of the previous 5-year range.
Domestic production and imports can respond to distillate demand shifts more easily than natural gas and other fuels. However, because of the high cost of crude oil this winter, incremental supplies will be costly, and price responses to demand surges may be significant. This will be particularly true if distillate inventories slip further below normal during the fourth quarter, which appears likely, EIA said. Thus, a strong upward price risk emerges for heating oil if winter temperatures move well below normal.
Heating bills
In Table 1, EIA summarizes historical and base case (normal weather) demand, total expenditure, and price projections for key heating fuels on a per-household basis. The calculations focus on consumption and projected weather factors (i.e., changes in heating degree-days) in particular regions of the country, but they assume national average consumer prices for heating fuels. Thus, heating bill calculations illustrate the magnitude of the expected changes in fuel bills rather than the actual expenditures incurred by individual consumers.
Higher expenditures for this winter are likely to be below those of the 2000-01 winter—the fifth coldest in the last 25 years—when low storage levels at the onset of the season and a cumulative slump in new supply capacity due to previous drilling declines caused a sharp spike in natural gas prices.
The results shown in Table 1 appear to apply across all major US regions except the West, which experienced a 2% colder-than-normal winter last year, EIA reported. Consequently, the probability is high that heating demand and expenditures will be lower there this year. Because natural gas provides most of the heating demand in the West, about 15% of the natural gas heating market may not see demand pressure above last year's level.
Extreme weather cases
EIA's extreme weather cases (Table 2) incorporate various demand and price scenarios in response to extreme cold and warm conditions and include uncertainties about key fuel supplies and prices based on future economic growth.
In each case, EIA focused on the likely consequences of weather deviations 10% higher or lower than normal, measured in terms of aggregate heating degree-days. To simplify the analysis, it is assumed that the deviations are proportionally distributed over the winter based on the "normal" heating degree-day pattern. A winter that is 10% colder is assumed to result in an additional 10% in heating-related demand across fuels.
