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Consumers may catch a break on heating bills

Even as oil prices hit record highs this week, some homeowners may just catch a break on their heating bills. A lot depends on what kind of fuel you use. By's John W. Schoen.
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This summer’s run-up in energy prices pinched consumer pocketbooks at the gasoline pump and helped put a dent in overall spending. With crude oil prices at near-record levels, many are looking at the potential for high heating bills this winter, especially in the Northeast, where homeowners are more likely to rely on heating oil.

But customers who depend on natural gas could catch a break, especially if forecasters are right when they predict a milder-than-usual winter this year.

After peaking at a record of nearly $84 a barrel this week, crude oil prices took a dive Wednesday on news of an unexpected buildup in inventories. Some analysts believe the drop may continue if investors who had bid up the price in recent weeks reverse course and begin selling.

“We have seen a 20 percent rise in the past month in the price of oil,” said Sara Nunnally, editor of Material Profits, a newsletter that specializes in energy and natural resources. “I think it is overdone and we should see a drop.”

Crude oil inventories have been falling in recent weeks, but inventories are still running above their five-year average level for this time of year. Despite isolated crimps in production in the Gulf of Mexico, oil traders have also bid up prices on fears that increased hurricane activity poses an ongoing threat to supplies. Recent pledges by OPEC producers to keep production at current levels have also helped keep prices up.

But crude prices are still well above last winter's levels, and for users of heating oil, that means they’ll likely pay more to heat their homes this winter. And heating oil inventories are already below normal for this time of year, which could put added pressure on prices. The Department of Energy recently projected heating oil prices in the Northeast, where the majority of heating oil is consumed, will jump more than 11 percent this winter to $2.78 a gallon on average, 28.5 cents higher than a year ago.

Heating oil prices may also be more volatile than last year, following a switch to new air quality standards for refiners. Those rules require makers of diesel, which is similar to the grade of fuel used to heat homes, to make big cuts in the sulfur content of diesel transportation fuel. That means fewer refiners will be making the higher sulfur used for heating oil, according to John Kilduff, an energy analyst at ML Global.

“The question is: Are these new lower levels sufficient for the unique heating oil needs that they only serve?” he said. “There will be no call on this product any longer from the transportation sector.”

The overall impact of any possible supply problems will be blunted by the reduced reliance on heating oil by homeowners, who have gradually found other ways to heat their homes. Last year, the average annual volume of heating oil sold to residential customers fell to a new low of 1.2 million gallons per day — about a third of consumption levels 10 years ago.

For homes heated with natural gas — the fuel used by the majority of U.S. households — the outlook is somewhat better. A cooler-than-normal summer eased demand for air conditioning — and the electricity generated by natural-gas fired power plants. That’s left natural gas inventories some 8 percent higher than the five-year average for this time of year.

Of course, while natural gas supplies are holding up relatively well, the size of your heating bill this winter will depend heavily on the weather.

“Come December first, if there hasn’t been much in the way of an early cold we should be on our way to lower prices than we saw last year,” said Kilduff.

Long-range forecasts suggest that homeowners in many parts of the country could catch a break from the weather. Last winter, warm weather cut demand for oil throughout the Northern Hemisphere by some 900,000 barrels a day, according to the International Energy Agency.

U.S. government forecasters said last week that temperatures in much of the Northeast are likely to remain above normal from October to January. The National Oceanic and Atmospheric Administration said most of the U.S. will also likely see above-normal temperatures in October through December, though not as mild as last winter. NOAA forecasts colder weather along the Canadian border from Montana westward and in the Southeast along the South Atlantic coast.

The forecast for milder weather in the first half of the winter, which is shared by some private forecasters, is based on a long-range weather pattern called La Niña, a cooling of temperatures of the Pacific Ocean that typically brings a shift in weather patterns in the U.S.

That view is also held by one of the oldest sources of long-range weather forecasts, the Old Farmer's Almanac. The latest edition, which went on sale earlier this month, says that based on its own proprietary formula, it predicts that 2008 will bring the warmest year in a century.