EIA Winter Fuels Outlook

Heating oil, a variation of distillate fuel oil or diesel, is the primary space heating fuel for 3% of U.S. households. EIA expects these homes will spend 8% less on heating oil this winter than last. More than 80% of the homes that use heating oil as their main heating fuel are in the Northeast.

Even though EIA publishes heating oil consumption as a U.S. average, the lack of consumption outside of the Northeast means the U.S. average heating oil price is heavily weighted toward the Northeast and corresponds closely to the Northeast regional average price.

Lower heating oil prices and less heating oil consumption drive lower heating oil expenditures in EIA’s base case forecast. EIA estimates that U.S. households that use heating oil for space heating will consume an average of about 400 gallons (gal) of heating oil this winter, or 4% less than last winter. It is expected that heating oil prices will average about $3.50/gal, 4% less than last winter. At this price, homes that primarily heat with heating oil will spend an average of $1,390 this winter.

In the colder case, it is expected that the average household using heating oil as its primary heating fuel will consume 4% more heating oil than last winter. Although EIA expects heating oil prices will be 3% less than last winter in that case, the increase in consumption means heating oil expenditures would be 2% more than last winter. Conversely, in the warmer case, EIA estimates that heating oil consumption would be 10% less than last winter and prices 5% lower, resulting in expenditures decreasing by 15% from last winter.

Lower heating oil prices reflect lower crude oil prices this winter. However, EIA forecasts this drop in crude oil prices will be partly offset by wider crack spreads for distillate fuel. Crack spreads broadly indicate refiners’ margins and are calculated by subtracting the price of crude oil from the wholesale price of a petroleum product. It is expected that crack spreads will increase this winter relative to last winter. For consumers, wider refining margins translate to higher prices for petroleum products.

Inventories of distillate fuel oil on the East Coast (PADD 1) remain below the five-year average for this time of year. Although we expect refinery runs to decrease in line with seasonal trends, we don’t expect refinery maintenance that would delay production this winter.

The East Coast region has only 5% of the United States’ refining capacity and most of that capacity is concentrated in New Jersey and Pennsylvania. Additional supply of distillate in the Northeast generally comes by pipeline from elsewhere in the United States, especially from the U.S. Gulf Coast (PADD 3). In particular, the Colonial Pipeline system extends from the Gulf Coast to as far as New York Harbor. Imports from eastern Canada are also a crucial source of Northeast regional supplies, which enter the region through maritime imports into Boston and other coastal ports.

Trends in heating oil prices tend to follow crude oil prices, which are subject to uncertainty associated with global petroleum markets. Possible changes in the outlook for crude oil prices or supply shortfalls on the global distillate market present a source of uncertainty that could contribute to higher-than-expected distillate prices. Any increase in global distillate prices is likely to translate to higher domestic heating oil prices.

PROPANE

In its base case forecast, EIA expects households heating primarily with propane will pay less than they did last winter on average across the United States, primarily as a result of lower prices. Propane is used as a heating fuel in 5% of U.S. households, mostly in rural areas.

In the Northeast, EIA expects households to spend 11% less this winter, the largest decrease among the regions, because of less consumption and lower prices. We expect households in the South to spend 9% less on propane this winter. In the colder scenario, these expectations shift to values that are closer to or more than last winter’s propane expenditures, especially in the Midwest, where propane expenditures would be 6% more than last winter with colder weather assumptions.

Because propane can be produced from both crude oil and natural gas, propane prices typically follow the prices of crude oil and natural gas but can vary significantly depending on supply and demand conditions, particularly in response to winter weather. We expect the U.S. average retail propane price will average $2.46 per gallon (gal) throughout the winter, 7% less than the previous winter.

The Midwest often has lower retail propane prices than other regions. We forecast the Midwest retail price will average just under $2.00/gal this winter. The Midwest has a network of propane distribution hubs throughout the region, making retail supply more accessible compared with other regions.

Propane inventories typically build from April to September, when propane consumption is relatively low, and fall during the winter. At the end of September, U.S. propane inventories totaled 103 million barrels, 12 million barrels more than the previous five-year average. We forecast that U.S. propane inventories will remain well above their previous five-year average throughout the winter.

High propane inventory levels have helped keep propane prices relatively low this year, a trend we expect to continue throughout this winter unless temperatures are much colder than our base case forecast. We forecast U.S. propane production to increase by about 2% this winter compared with last winter and for U.S. propane consumption to fall by 12% because of less propane consumption in the residential and commercial sectors.

In the early winter, we assume increased use of propane for crop drying will offset some of the drop in space heating consumption. In October and November, propane is consumed in commercial grain dryers when the corn harvest takes place, and we expect slightly more grain drying demand for propane at the start of this winter because the U.S. Department of Agriculture expects a relatively large corn harvest.