EIA: 2002-03 winter fuels ample, costly vs.2001-02

Tighter world oil markets and the resulting higher crude oil prices will result in higher relative fuel oil prices this winter, compared with last year's expenses.

By OGJ editors

HOUSTON, Oct. 8 -- 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, reported the Energy Information Administration Monday 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.

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 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 OPEC'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.

Higher heating bills
The higher expenditures for this winter are still 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.

EIA projected wellhead prices for natural gas to average $3.34/Mcf, compared with the previous winter's $2.42/Mcf. Residential prices are expected to average $7.75/Mcf, an increase of 5.7% over the winter of 2001-02 but still considerably less than the average of $9.50/Mcf 2 years ago.

Crude oil costs to US refineries are projected to average $28.60/bbl or 68.2¢/gal, up $10.50/bbl or 25¢/gal above the low levels of the previous winter season, EIA said. Strong demand growth, enhanced by normal weather, likely will push average prices above $30/bbl during the peak winter period, after which they should ease but remain above $25 until probably 2004 when world inventories move toward more comfortable levels.

EIA expects residential propane prices for the upcoming winter heating season to remain above the prior year's. Under the base case scenario, residential prices are expected to average $1.20/gal, compared with $1.10/gal last winter.

These results 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.

Based on winter-season data on heating degree-days during 1975-2001, EIA estimates that the nation faces a 10% chance that this winter's total heating degree-days will be either 10% above or below the normal range, in which case demand and prices will be affected proportionately.

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