Actually this winter is forecasted to be normal. But compared to last year’s milder than normal weather, “The assumption of normal weather this winter translates into a scenario that is 12% colder than last winter,” states the EIA.
With normal weather, fuel inventories are expected to be sufficient to avoid any dramatic price spikes this winter. “Despite a hot summer this year (cooling degree-days were about 11 percent above normal), increased natural gas demand in the electric power sector did not substantially derail natural gas storage from its track toward very high (perhaps record) preseason levels,” notes the EIA. “This situation provides a direct cushion against price spikes.”
However, the agency says, “High oil prices and expected strong demand increases are expected to generate higher winter fuel bills for most residential customers compared to the winter of 2001-2002.”
STRONG NATURAL GAS DEMANDThe EIA reports that “sharp increases” in the demand for natural gas are likely not only because of the high probability of colder weather this winter, but also because of the “expectation of a solid recovery in the U.S. industrial economy by the fourth quarter of this year and into 2003.” The predicted increase in natural gas demand is 12% over last year.
A strong increase in demand would send prices higher. “This winter, we expect to see natural gas wellhead prices averaging around $3.20 per thousand cubic feet, or about $0.80 per thousand cubic feet above last winter’s price.”
Adds the agency, “The conditions that bear watching during the next two months are the weather and the volume of working natural gas in underground storage that is likely to be in place by November 1 (the date considered to be the start of the heating season).”
HIGHER HEATING OIL PRICESPrior to the start of the heating season, fuel oil suppliers normally direct their efforts toward building their inventories for the coming winter, which increases demand and pushes up the price. But economic recovery and the expectation of crude oil price increases will also help to push up fuel oil prices, says the EIA.
“This winter, retail heating oil prices are projected to be about 21 cents per gallon above those of the previous winter. Higher expected crude oil prices this winter (about $8.00 per barrel or 19 cents per gallon above last winter) account for most of the projected difference.”
The agency also points out that last year’s heating season in the Northeast — where 75% of the United States’ heating oil is consumed — was 18% warmer than normal, which significantly reduced the demand pressure on heating oil prices. With a normal winter in the Northeast, prices would naturally see a substantial increase compared to a year ago.
ILLUSTRATIVE EXAMPLEAn illustrative sample of the EIA’s projected home heating fuel price increases for this winter is shown in Table 1. It provides consumption, average price, and expenditure data for natural gas in the Midwest, heating oil in the Northeast, and propane in the Midwest.
Historical data is supplied for the last three heating seasons. For its 2002-2003 forecast, EIA shows consumption and prices rising across the board. Looking at natural gas in the Midwest, consumer expenditures are expected to increase from a typical bill of $596 last year to $700 this season, a 17% boost. In the Northeast, expenditures for heating oil are predicted to jump from $642 to $913, a 42% hike. Propane users in the Midwest could see their bills go from $887 to $1,076, a 21% increase.
While heating bill increases ranging from 17% to 42% may not be seen as “severe price spikes” by the EIA, many homeowners are likely to perceive them as significant price increases. If heating fuel price does become an issue with consumers, contractors are likely to see greater interest from customers in making efficiency improvements and in moving up to higher efficiency furnaces and boilers.
Exactly where that fuel price point is, and whether this winter’s heating bills will reach it, remains to be seen.
Publication date: 09/30/2002