EIA increases winter heating bill projections

The US Energy Information Administration, in its latest short-term energy outlook, warns that the homeowners using home heating oil will pay about 40% more this winter, despite recent drops in crude oil prices. It said households using gas will pay 70% above 1999-2000 levels.

The US Energy Information Administration, in its latest short-term energy outlook, warns that the homeowners using home heating oil will pay about 40% more this winter, despite recent drops in crude oil prices.

EIA said lower prices were offset by higher demand, particularly in November and December, both of which had 28% more heating degree-days in the Northeast in 2000 than they did in 1999.

"While prices have eased some in recent weeks, the heating oil market is still relatively tight and subject to significant volatility. Still, it is worth noting that, despite very cold temperatures over the last 2 months, the heating oil market has held up rather well."

EIA said since the end of November, crude oil prices have fallen sharply. The average price for West Texas Intermediate was $34.30/bbl in November and $28.40 in December.

"Our analysis of industrialized country stocks suggests that additional weakening in the price through 2001 should be limited, especially given the likelihood of a significant output cut by the Organization of Petroleum Exporting Countries before the winter is done. Indeed, some intermediate increases from the average December level are likely, in our view. Still, we see average annual prices declining by about $1-$1.50/bbl in 2001 and by perhaps $5/bbl in 2002."

EIA said natural gas prices have increased sharply, forcing upward adjustments in its average winter gas price projections.

"Very large increases in heating-related demand appear to have materialized in November and December, resulting in a sharp reduction of gas available in storage to well below the previous low recorded by EIA.

"The end-December 2000 estimated working gas storage level is approximately 10% below the previous low seen since 1973 which occurred in 1976. Continued strong demand (from normal weather) this winter would keep gas stocks at minimal levels for the remainder of the heating season and ensure strong injection-season demand next spring and summer.

"We see average gas wellhead prices as averaging about $5.20/Mcf in 2001 (compared to an estimated $3.70 in 2000) and about $4.50/Mcf in 2002.

"We have raised our estimates of increased heating expenses for residential consumers who heat with natural gas to approximately 70% above 1999-2000 levels for the current heating season. Our previous estimate was between 50 and 55%."

EIA said much higher estimated demand (particularly due to the cold weather in November and December) as well as somewhat higher residential prices combined to generate the higher estimates. The expected 45% increase in the nominal average residential price would be the highest season-to-season growth rate since at least 1975.

Oil prices
EIA said the US imported crude oil price in December averaged $25.50/bbl (about $28.40 for West Texas Intermediate), or about $6/bbl lower than in November.

EIA had earlier expected that the tight oil stock situation worldwide would continue to provide price support, and prevent prices from falling significantly until mid-2001.

"Recent price declines have indicated more weakness in the near-term market. However, EIA believes that the OPEC basket oil price (roughly equivalent to the average US imported crude oil price) will remain well within (and probably toward the higher end of) OPEC's target range of $22-$28/bbl in 2001, particularly if OPEC institutes significant cuts in oil production in the early part of 2001.

"In fact, we believe that some near term price increases may appear until the extent of any OPEC cuts is sorted out. EIA then projects that oil prices will decline in 2002 toward the lower end of the target range as industrialized country oil stocks move closer to normal levels."

EIA assumed that production from ten OPEC nations (except Iraq) will decline by about 1 million b/d from December levels by spring, with half of this decline coming from Saudi Arabia. With this assumed decline, OPEC 10 production is expected to return to roughly its July 2000 level.

Although EIA had previously projected that OPEC would need to cut output to support prices, the larger cutbacks being discussed by OPEC have resulted in EIA's lowering its projection of OPEC production in 2001 by 500,000 b/d.

EIA said it lowered its projections slightly for Iraqi exports and production in 2001.

Non-OPEC production is expected to increase by about 800,000 b/d in 2001 and 2002 after posting an estimated increase of 1.2 million b/d in 2000.

"Between 40-50% of these increases are expected to come from the former Soviet Union, with smaller increases from other regions. No further increases are expected from the North Sea as output from new fields is not expected to outstrip declines in maturing fields," EIA said.

More in Economics & Markets