Colder Winters and Fuel Volumes

By Keith Reid

A variety of factors go into determining whether a heating season is good for the industry or not so good. With heating fuel, price tends to have an impact on volume with some people turning down the thermostat as the cost to fill the oil tank moves up. And then you have the weather. The more days that are cold enough to require heating and the colder the weather during those days, the more gallons that are typically consumed. This is conventional wisdom and is certainly true at a foundational level.

The term “Polar Vortex” has been thrown around quite a bit lately, but regardless of the tag line NOAA heating degree day calculations show that the last two heating season have been significantly colder than normal, with this year’s heating season being slightly less extreme than 2013-2014. For those not in the know, which should be very few Fuel Oil News readers, EIA defines a HDD as: A measure of how cold a location is over a period of time relative to a base temperature, most commonly specified as 65°F. The measure is computed for each day by subtracting the average of the day’s high and low temperatures from the base temperature (65°), with negative values set equal to zero. Each day’s heating degree days are summed to create a heating degree day measure for a specified reference period. Heating degree days are used in energy analysis as an indicator of space heating energy requirements or use.

The National Oceanic and Atmospheric Administration typically pulls data from daily temperature observations at nearly 200 major weather stations to determine HDD data for the United States.

While 2014-2015 heating season was slightly less extreme nationally than the previous season, if you look at HDD data regionally then 2014-2015 was slightly more extreme for those in the Northeast. As the Washington Post recently noted, much of the highly populated northeastern United States had one of its top three coldest first quarters of the year in records dating back to 1895.

For example, looking at NYSERDA data for New York between July 1, 2014, and March 18, 2015, there were 6,261 HDDs compared to 6,256 for the same period in the preceding heating season. The “normal” for comparison is stated to be 5,706.

The cost of heating oil had little in common between the two heating seasons. Prices were still astronomical going into the 2013 season but had plummeted and stayed relatively suppressed moving into the 2014 season. According to EIA the average family heating cost with oil dropped from $2,355 to $1,784 respectively. This should have resulted in consumers being a little less frugal with the thermostat 2014-2015.

All in all, EIA data would support more gallons have been consumed the previous two heating seasons as a result of the colder weather. However, some heating fuels marketers might find their number of gallons moved less than expected and not necessarily linear in relationship to the increase in HDDs. Ultimately, the specific residential or commercial property can work to put a cap on the maximum amount of fuel that can be burned on any given day.

“A customer calls and says he cannot get the temperature in the house above 61°,” said Philip J. Baratz, president of Angus Energy and the Managing Member of Angus Partners, LLC. Angus began providing hedging services in 1991. “The thermostat is set at 68° but it just won’t go any higher than 61°. And the oil company is thinking about all sorts of things like, well, you need more insulation and your equipment might not be sized right. But at the end of the day the bigger picture is that this person’s equipment is running 24 hours straight and it can’t warm-up the house.”

He noted that customers who cannot get their homes up to 68° when it’s 10° below zero, might not be able to get their homes that warm at 5° below or even 5° above zero. In that scenario the colder it gets outside the K-factor (gallons per degree day) goes a bit awry because those customers are not consuming any more oil because they just can’t. One of those customers that would normally burn 1 gallon per five HDDs and then it drops another 15° is not going to burn an additional 3 gallons. “So multiply that by the number of cold days and by the number of customers and people are going to scratch their heads,” Baratz said. “When people are closing the books, say in February, they are going look back and say wait a second. It was 35% colder than normal why were deliveries only 15% more than normal?”

This can potentially lead to dealers making miscalculations in their fuel procurement strategies.

Baratz noted that from November through most of January the weather was fairly normal. The coldest weather was during the month of February. “If you’re showing me a season that is steadily 10% colder every single month then you can make the argument the deliveries should have been about 10% higher than normal, but if it’s all concentrated in such a short period of time people are going to scratch their heads and wonder,” Baratz said. “And the worst thing that happens is they change their K-factors in their system next year and you get run outs.”

When a customer calls in to complain, or you notice that a customer is potentially not living in a tight house, Baratz’s advice is to seize the opportunity to help those customers out—they will remember it. That can involve explaining the situation and providing the solutions or references so that he or she can get better insulation or more capable heating appliance. Further, consider tank-monitors. But if not, be a little leery of depending too much on K-Factors early next winter.

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