EIA: Colder weather, higher energy costs to raise household expenditures this winter

As the winter season approaches, the U.S. Energy Information Administration (EIA) forecasts average household expenditures for all major home-heating fuels will rise.

According to the EIA, the anticipated rise comes from an expectation of both colder weather and higher energy costs for winter 2017-18. Average increases compared with last winter vary by fuel, but propane leads, with expected growth of 18 percent. Other fuel expenditure growth includes heating oil by 17 percent, natural gas by 12 percent and electricity by 8 percent.

Most of the increases reflect expected colder weather rather than higher energy costs.

Temperatures this winter, based on a recent heating degree-days forecast from the National Oceanic and Atmospheric Administration (NOAA), are expected to be colder than last winter across the country despite last winter being significantly warmer than usual. On average, NOAA is predicting temperatures across the United States to be 13 percent colder than last winter, with forecasts ranging from 27 percent colder in the South to 4 percent colder in the West.

Despite the expectation of colder temperatures than last winter, temperatures across the eastern United States are expected to be comparable to the average of the previous five winters, according to NOAA. In the West, NOAA is predicting temperatures to be about 7 percent colder than the previous five-winter average.

Recent winters are reminders that weather is unpredictable. The 2013-14 and 2014-15 winters were generally colder than normal, while the last two were warmer than normal.

Propane breakdown

Propane’s expected 18 percent growth in household heating expenditures is the largest among the four household heating avenues. About 5 percent of all U.S. households heat primarily with propane. The EIA predicts these households will spend more because of the expected increase in heating demand and higher propane costs.

The projected increases in expenditures from last winter vary by region. The EIA expects households heating with propane in the Northeast will spend an average of $221 (11 percent) more this winter, reflecting prices that are about 6 percent higher and consumption that is 5 percent higher than last winter. Households in the Midwest are expected to spend an average of $249 (21 percent) more this winter, with average prices that are 8 percent higher and consumption that is 12 percent higher than last winter.

The EIA is also predicting propane prices to be higher than last winter due to an increase in crude oil prices – which feed into higher prices for propane – and tighter propane supplies nationally. Propane production at natural gas plants and refineries is forecast to be 7 percent higher this winter when compared to last, while total propane consumption is expected to be 2 percent more than last winter and net exports 4 percent lower, according to the EIA.

Residential propane prices entered the 2017-18 heating season at an average of $2.23 per gallon, over 24 cents per gallon more than at the start of last winter’s heating season. Wholesale propane prices averaged $1 per gallon, 37 cents per gallon higher than the first collection week in October last year.

Inventory update

In the last week of September, the EIA reported U.S. propane inventories were at 78 million barrels, which was 9 percent below the previous five-year average.

The National Propane Gas Association (NPGA) and IHS Markit cite days of supply as a key metric in determining adequate propane inventory levels to meet U.S. demand. IHS defines days of supply as inventory at month’s end, divided by demand plus exports.

“The U.S. started winter (the heating season) at lower days of supply (41) than the polar vortex winter [of 2013-14],” says Debnil Chowdhury of IHS Markit, who presented at NPGA’s Propane Supply and Logistics Committee meeting in October in Minneapolis. “This is lower than the 46 [days of supply] in 2013 to start winter and is due to PADD 3 inventory (the Gulf Coast) being lower.”

In the 2013-14 winter, the U.S. propane industry experienced regional supply and distribution challenges amid extreme cold temperatures and high exports. The U.S. propane industry must be aware of global supply factors, including Japan’s minimum inventory requirements and growing demand in India and China, which can impact product available for the U.S. domestic market, Chowdhury says.

“U.S. inventory looks OK, but if exports remain strong, we risk reaching critical days of supply due to inventory in PADD 3,” he says. “We could be under 20 days in February again,” similar to the 19.2 days of supply experienced early this year.

Strong global demand for propane contributed to Gulf Coast and Midwest inventories that remained on the low side of the normal inventory range since early 2017.

“The build season started later than usual and the draw season started earlier than usual, due to exports,” Chowdhury says.

However, inventories rose sharply in late August and into September following Hurricane Harvey, as propane-consuming petrochemical plants, export facilities and the entire distribution system were not fully operational.

“We expect exports to remain strong in September and the fall due to delayed exports from Harvey,” Chowdhury says.

In the Midwest, propane inventories increased to reach levels near the five-year average, according to the EIA. However, the process and timing of inventories reaching normal levels this year were unusual. These late-season inventory builds may have been bolstered by a disruption to the normal flows of propane from the Midwest to the Gulf Coast due to Harvey.

Although the pattern of propane inventory builds varies from season to season, inventories in the Midwest are typically between 25 and 28 million barrels by the start of October. Inventories this year grew by 10.9 million barrels from the start of June to 26.4 million barrels for the last week of September, according to the EIA. This year’s build pattern differs from the past two years, when inventories started above the five-year average and then built steadily to the 25-to-28 million-barrel range.

The builds in Midwest propane inventories appear to have occurred throughout the supply chain and not only at the main hub of Conway. A regional breakdown shows sticks across the northern Midwest at or above the five-year averages, according to the EIA. It predicts inventories are near or above the five-year averages in Michigan, the Illinois-Indiana-Ohio region and the Iowa-Minnesota-Wisconsin region.

NOAA forecasts winter weather in the Midwest to be 15 percent colder than last year, but in line with the five-year average.