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EIA’s Winter Fuels Outlook

The U.S. Energy Information Administration (EIA) expects that average expenditures for the major home heating energy sources will decline for most households this winter compared with last winter because of warmer forecast temperatures across much of the country.

Forecast changes in household heating expenditures vary significantly by both fuel and region. For the average U.S. household, EIA expects that both natural gas and electricity bills will decline by 1%, home heating oil by 4%, and propane by 15%.

Although the lower average forecast expenditures largely reflect warmer forecast temperatures this winter compared with the winter of 2018–19, a colder-than-average winter could lead to increases in expenditures compared with last winter. In addition, retail heating oil prices could rise above forecast levels because of ongoing uncertainties. For example, there is uncertainty regarding the effect global sulfur restrictions for marine fuels that go into effect in January will have on global distillate fuel markets. Additionally, distillate fuel inventories in the Northeast, the main residential heating fuel market, are low heading into winter. For this outlook, EIA defines the winter season as October through March. The average household winter heating fuel expenditures discussed in this supplement are a broad measure for comparing recent winters. Fuel expenditures for individual households are highly dependent on the size and energy efficiency of individual homes and their heating equipment, along with thermostat settings, local weather conditions, and market size.

Based on the most recent forecast of heating degree days (HDD) from the National Oceanic and Atmospheric Administration (NOAA), EIA expects temperatures for the winter of 2019–20 to be warmer than last winter for most of the country. On a national-average basis, temperatures last winter were slightly colder than the most recent 10-winter (2009–10 through 2018–19) average. HDD are an approximate measure of how cold temperatures are compared with a base temperature—more HDD indicate colder temperatures. On average, EIA expects total HDD for the winter of 2019–20 across the United States to be 4% less than last winter. However, the forecast varies among U.S. regions, and forecasts range from 7% fewer HDD than last winter in the Midwest region to no change in HDD from last winter in the South region.

Although NOAA forecasts temperatures this winter to be warmer than last year, recent winters provide a reminder that weather can be unpredictable. The winters of 2013–14 and 2014–15 were generally colder than normal, but the winters of 2015–16 and 2016–17 were much warmer than normal. Recognizing this potential variability, the Winter Fuels Outlook includes scenarios where HDD in all regions are 10% higher (colder) or 10% lower (warmer) than forecast.

Heating Oil

EIA expects retail heating oil prices to be slightly lower this winter compared with last winter. The forecast lower heating oil prices are the result of lower expected crude oil prices that partly offset by higher refining margins. However, crude oil prices have been volatile since May of this year and have recently experienced significant volatility after the recent attacks on crude oil production facilities in Saudi Arabia. As a result, crude oil prices are uncertain heading into this winter heating season, and any deviation in crude oil prices from forecast levels would cause a similar deviation in retail heating oil prices and consumer expenditures. Changes in crude oil and wholesale heating oil prices pass through to retail heating oil prices much more quickly than changes in wholesale natural gas prices pass through to customers’ rates. Also, many heating oil users buy supplies ahead of the winter and refill as needed. When forecasting expenditures, EIA does not account for the fact that heating oil consumers purchase fuel ahead of its use. EIA assumes consumers pay the prevailing retail price at the time fuel is consumed. EIA forecasts that the Brent crude oil price will average $59/barrel (b) this winter, which is $7/b lower than last winter. In October 2018, the beginning of STEO’s winter heating season, Brent crude oil prices averaged $81/b, the highest monthly average of the year, before falling to an average of $57/b by December and $63/b during the first quarter of 2019. EIA forecasts that Brent crude oil prices will average $60/b this October and will fall slightly to an average of $58/b by March 2020. The lower forecast for Brent crude oil for this winter compared with last winter primarily reflects uncertainty about global economic growth and its effect on global petroleum demand. EIA expects lower forecast crude oil prices this winter to be offset by higher refinery margins (the price difference between wholesale heating oil and Brent crude oil). For winter 2019–20, EIA estimates that heating oil wholesale margins will average 55 cents per gallon (gal), which would be 17 cents/gal higher than last winter and 22 cents/gal higher than the previous five-winter (2014–15 through 2018–19) average. The higher forecast margins reflect the increased demand for low sulfur marine distillate fuel as a result of the upcoming International Maritime Organization regulations in 2020, which EIA expects to affect all distillate fuel prices such as heating oil.

In addition, EIA expects margins to be supported by continued demand for U.S. distillate fuel exports. However, a decelerating global economic growth is putting some downward pressure on margins. The severity with which any of these factors affect the market depends on several variables. So, EIA views uncertainty in distillate fuel prices, in addition to uncertainty in the crude oil market itself, to be greater this winter than in previous recent winters.

EIA expects households whose primary space heating fuel is heating oil to spend an average of $1,501 this winter on heating oil, $69 (4%) less than last winter. The decline in expenditures reflects EIA’s forecast that retail heating oil prices will be 5 cents per gallon (gal) (2%) lower than last winter and consumption will be 3% lower than last winter. Although total expenditure on heating oil is forecast to be slightly less than last winter, it will be the second highest since the winter of 2014–15.

In the scenario that assumes a 10% colder-than-forecast winter, forecast expenditures for heating oil are $105 (7%) higher than last winter. In this case, EIA forecasts heating oil prices to be 2 cents/gal (1%) higher than last winter and consumption to be 6% higher. In the 10% warmer scenario, EIA forecasts expenditures to be $222 (14%) lower than last winter, resulting from heating oil prices that are 9 cents/gal (3%) lower and consumption that is 12% lower.

Customers in the Northeast rely on heating oil more than in any other region. About 20% of households in this region use oil for space heating, down from 25% seven years ago. An increasing number of homes in the Northeast have switched to natural gas and electricity for space heating. Nationwide, 4% of households use heating oil for space heating.

Distillate fuel inventories (which include heating oil) in the Northeast totaled 28.8 million barrels on September 27, 9.9 million barrels (26%) lower than the five-year (2014–18) average for that week and 2.1 million barrels (7%) lower than at the same time last year. A number of supply options are available in the Northeast including pipelines, coast-wise compliant vessels from other U.S. ports, and imports from other countries in the actively traded Atlantic Basin. As a result, EIA does not expect significant supply disruptions or resulting price fluctuations in the Northeast.

In the winter of 2019–20, EIA expects strong distillate margins to encourage refiners to increase refinery runs and maximize distillate production. EIA forecasts total refinery inputs to average 17.1 million b/d in the 2019–20 winter, a 1% increase compared with the 2018–19 winter. In the 2019–20 winter, EIA expects total refinery and blender net production of distillate fuel to average 5.5 million b/d, an increase of about 300,000 b/d compared with the 2018–19 winter.

However, if temperatures become severely cold, the Northeast typically increases imports of distillate fuel to help meet demand. As a result, prices have the potential to rise above forecast levels. Higher prices encourage imports into the region. If a cold snap in the U.S. Northeast coincides with a cold snap in Europe, then the European cold snap could place additional upward pressure on distillate prices because Europe is the main source of U.S. imports.

Propane

About 5% of all U.S. households use propane as their primary space heating fuel, and many of these households are in the Midwest and Northeast. EIA expects these households to spend 15% less on average for heating this winter compared with last winter, but forecast changes in expenditures vary by region. EIA expects that households heating with propane in the Northeast will spend an average of $228 (12%) less this winter than last winter, a result of prices that are 10% lower and average household consumption that is forecast to be 3% less than last winter. EIA expects households in the Midwest to spend an average of $236 (17%) less this winter, reflecting average prices that are about 12% lower than last winter and consumption that is 6% lower. Similar to heating oil, changes in wholesale propane prices pass through relatively quickly to retail propane prices, and many propane users buy supplies ahead of the winter and refill as needed. When forecasting expenditures, EIA does not account for the fact that propane consumers purchase fuel ahead of its use. EIA assumes consumers pay the prevailing retail price at the time fuel is consumed. In the 10% colder-than-forecast scenario, EIA’s forecast expenditures for propane are about the same as last winter in the Northeast, with prices that are 16 cents/gal (5%) lower than last winter and consumption that is 5% higher.

Editor’s Note: This is an excerpt. The complete EIA Winter Fuels Outlook can be found at https://www.eia.gov/outlooks/steo/.

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