This Week In Petroleum

Released on February 12, 2010
(Next Release on February 18, 2010)

Does Groundhog Day occur too late for heating oil consumers?

Groundhog Day, which is celebrated in the U.S. and Canada on February 2^nd, has its origins in European weather folklore, where a badger rather than a groundhog is the weather forecaster. The most famous Groundhog Day celebration occurs in Punxsutawney, Pennsylvania. Tradition holds that if Punxsutawney Phil sees his shadow when emerging from his burrow, as he did this year, there will be six more weeks of winter weather. Overcast conditions and the absence of a shadow signify warmer weather for the rest of winter.

Groundhog Day occurs near the midpoint of the winter season in the Northern hemisphere, which runs from the winter solstice (the shortest day of the year, December 21 or 22) to the spring equinox (when the night and day are of equal length, March 20 or 21). The Energy Information Administration (EIA), on the other hand, defines the heating season as running from October through March, the months of the year in which population-weighted heating degree days (the average of daily low and high temperatures subtracted from the base of 65 degrees Fahrenheit) reach their maximum level.

Ignoring questions surrounding the accuracy of the forecast, Groundhog Day probably comes too late in the heating season to provide any significant options for the heating oil consumer. During an average heating season, residential customers will have already consumed about two-thirds of their heating oil by Groundhog Day. EIA offers somewhat more timely help for consumers by providing projections for heating fuel prices, consumption, and average household expenditures starting in October (the beginning of the heating season) in the Short-Term Energy and Winter Fuels Outlook. These projections are updated monthly through March in the Outlook, in Table WF01. Average Consumer Prices and Expenditures for Heating Fuels.

Household expenditures on heating oil are determined by two factors: the volume of heating oil consumed by an average household and its price. Average household heating oil consumption projections are based on average household consumption from the EIA 2005 Residential Energy Consumption Survey, which are adjusted using weather forecasts from the National Oceanic and Atmospheric Administration (NOAA). Projected heating oil prices are a function of crude oil prices, available supply measured as projected inventories of distillate fuel, and weather. Of course, EIA's forecasts are subject to significant uncertainty, involving not only the weather but also the price of oil.

By far the largest component in the price of heating oil is the price of crude oil. As a rule of thumb, every $1 per barrel change in the price of crude oil will result in 2.4 cents per gallon change in the price of heating oil. Therefore, the more accurate the crude oil price projections are, the more accurate retail heating oil price forecasts will likely be. However, crude oil prices are highly uncertain, as shown by the measure of implied volatility EIA calculates from the market value of options on contracts for future delivery of crude oil. For example, although the October 2009 edition of the Outlook forecast the average February 2010 price of West Texas Intermediate (WTI) crude oil to be $71 per barrel, the implied volatility indicated a 5 percent chance that the price could ultimately settle outside the $42 to $114 per barrel range.

The volatility of crude oil prices adds to the difficulty of making heating oil price projections. Table 1 shows how EIA's projections for crude oil as well as weather and distillate inventory levels have evolved over the last 5 months. While it has been colder than normal in some parts of the country, in the Northeast, where most of the country's heating oil is consumed, it has been slightly warmer than normal (with normal being defined as 5,152 heating degree-days over the October through March period). While average temperatures this winter have cycled between colder- and warmer-than-normal over the past 4 months, the forecast of total heating degree days this winter in the Northeast has been lowered by only 3 percent. Forecasts for end-of-the-heating season total distillate inventory levels, including heating oil and diesel fuel, have increased as a result of projected changes in the weather over the last several months and continuing weak diesel fuel demand.

Interestingly, the higher predictions for prices since October have been partially offset by lower predictions for heating degree-days. The result has been fairly stable household heating expenditure forecasts so far this winter. Table 2 illustrates how EIA's projections for consumption, prices, and total heating oil expenditures this winter in the Northeast have changed since the original forecast published in October 2009. As this heating season has unfolded, the projected total expenditure per household has not varied by a significant amount over time.

Is Punxsutawney Phil relevant this winter? Possibly, but EIA has no plans to abandon its reliance on NOAA weather forecasts anytime soon. It is also worth keeping in mind that the heating season is more than two-thirds over by the time he appears, and that oil price volatility is a larger source of uncertainty for heating oil expenditures than the weather. Therefore, unless Phil can advance his appearance date, open a reliable channel of communication to the bulls and bears in the oil market, and decide which of them to heed, heating oil consumers will continue to look to EIA and other oil market forecasters for insights as they decide how much to squirrel away for their heating bills.

Gasoline and Diesel Fuel Prices Fall for Fourth Week
The U.S. average price for regular gasoline fell for the fourth week in a row, dropping less than a penny to reach $2.65 per gallon, which was still $0.73 above last year. On the East Coast, the price decreased almost two cents to $2.67 per gallon. The Midwest average increased by over a penny to $2.57 per gallon, and Rocky Mountain prices rose by less than half a cent to $2.62 per gallon. Gulf Coast average prices fell almost 3 cents to $2.52 per gallon and remained the lowest regional prices in the Nation. The West Coast average dropped close to 2 cents to $2.90 per gallon and the price in California decreased over a penny to $2.96 per gallon.

Diesel prices also dropped for the fourth consecutive week, with the national average falling over one cent to $2.77 per gallon, which was still $0.55 above a year ago. Diesel prices fell in all regions of the country, as the East Coast dropped over one cent to $2.82 per gallon. The Midwest saw the smallest regional decrease of less than a penny to $2.72 per gallon, while Gulf Coast and Rocky Mountain prices each fell one and a half cents to $2.73 and $2.78 per gallon, respectively. West Coast prices decreased almost two cents to $2.86 per gallon, while the average in California slipped three cents to $2.92 per gallon.

Propane Inventories Decrease Again
The weekly draw on U.S. inventories of propane posted a 1.3-million-barrel decline last week, continuing the slowdown from this season's peak 4.8-million-barrel draw on January 15. With last week's stock draw, U.S. inventories of propane moved down to an estimated 32.6 million barrels as of February 5, 2010, continuing on a path below the lower limit of the average range for this time of year. The Gulf Coast region led the decline with a draw of nearly 1.0 million barrels. The Midwest region dropped by 0.4 million barrels and the Rocky Mountain/ West Coast region fell slightly. East Coast regional stocks increased by a slim margin. Propylene non-fuel use inventories decreased their share of total propane/propylene stocks from 8.6 percent to 8.5 percent.

Residential Heating Oil Prices Decrease
Residential heating oil prices decreased during the week ending February 8, 2010. The average residential heating oil price fell 1.3 cents per gallon to reach 285.1 cents per gallon, but was still 49.2 cents per gallon higher than the same time last year. Wholesale heating oil prices dropped 3.0 cents per gallon to reach 197.6 cents per gallon, 50.1 cents per gallon higher than at this time last year.

The average residential propane price gained 0.5 cent per gallon to reach 268.8 cents per gallon. This was an increase of 36.8 cents per gallon compared to the same period last year. Wholesale propane prices rose 7.1 cents per gallon to reach 152.7 cents per gallon. This was an increase of 66.4 cents per gallon when compared to the February 9, 2009 price of 86.3 cents per gallon.

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