Released on February 11, 2009
(Next Release on February 19, 2009)

Groundhog Economics: Will Punxsutawney Phil Cost You Money?

We celebrate Groundhog Day in the U.S. (and Canada) on February 2nd. Tradition holds that if Punxsutawney Phil, the most famous groundhog, sees his shadow that day when peeking out of his burrow, there will be six more weeks of winter weather. Conversely, a cloudy day portends warmer weather for the rest of winter. Late winter weather, particularly in the Northeast (where about 80 percent of U.S. heating oil is consumed), can affect heating oil consumption and, consequently, expenditures for the residential customer. Thus, when Punxsutawney Phil saw his shadow a week ago Monday, assuming you believe in the predictive powers of the groundhog, the average heating oil customer had to figure on consuming more energy than was expected to heat a home over the next month and a half. In most years, weather can indeed affect the price of heating oil (and hence expenditures), but that may not be the case this winter.

Rather than rely on groundhogs, EIA’s Short-Term Energy Outlook uses weather forecasts from the National Oceanic and Atmospheric Administration (NOAA). According to the most recent NOAA forecast, overall temperatures for the rest of the U.S. heating season (through February and March) will stay close to the 30-year average, with temperatures in the Northeast slightly colder than normal.

Household expenditures on heating oil are determined by two factors: the volume consumed and the price. Weather affects both heating oil consumption and, often, the price of the fuel. If heating oil markets are tight, cold weather can drive up wholesale and retail heating oil prices. Even crude oil prices could be pushed up globally if the weather in the New England and the Middle Atlantic regions stays considerably cold for an extended period. However, retail prices these days seem largely impervious to weather, even though the winter has been colder than normal.

Is the groundhog relevant this winter? When it comes to current prices, factors other than weather seem to be in play.

In the three month period of November 2008 through January 2009, prices for crude oil and wholesale and retail heating oil have dropped considerably compared to the same period a year ago. Of the three prices (crude oil, wholesale and retail heating oil), retail prices fell the least. At the same time, crude oil prices (WTI) dropped an average of over $1.00 per gallon while retail heating oil prices declined by only $0.63 per gallon. The precipitous drop in crude oil prices was largely the result of the sinking global economy. Under normal market conditions, the fall in crude oil prices would eventually be passed on to end-product prices. However, these are not normal times.

Two factors may offer an explanation for the smaller decline in retail heating prices. The first is the relative strength of the global distillate market. Distillate fuel includes both heating oil and diesel. In the United States, heating oil makes up a relatively small portion of the domestic distillate market while diesel fuel makes up most of the remainder. This is true for much of the rest of the world. Until fairly recently, distillate prices have shown surprising strength compared to other petroleum products due to strong global demand for distillate. As a result, distillate prices did not fall as much as crude oil prices.

The second factor may be related to events of the past summer. The summer is when heating oil customers are typically offered contracts to lock-in prices for the upcoming winter. The price for residential heating oil reached its historic peak last July, averaging $4.53 per gallon. Some heating oil customers may have been anxious about those unusually high prices and wanted to shield themselves from possibly higher prices in the winter. When a customer locks in a contract with a heating oil company, the company often enters into a similar contract with a wholesaler, guaranteeing they will be able to supply that customer with enough heating oil for the winter at a stable price. (This type of commitment is even required by law in Connecticut.) Moreover, many heating oil companies buy some of their heating oil in the off-season to ensure an adequate supply for the winter, regardless of any pre-arrangement with their customers. So another reason heating oil prices this winter have not fallen as quickly as crude may be that some of the volume heating oil dealers (and customers) bought earlier was quite expensive. Thus, a portion of this additional expense may have been passed on to the customer during this heating season.

When it came to heating oil prices, Groundhog Day 2009 may not have offered much insight. Despite recent cold weather, heating oil prices continue to decrease while crude oil prices stabilize. Perhaps, if Punxsutawney Phil had sent some signals about the global economy in February 2008, we’d all have a better handle on prices.

Residential Heating Fuel Prices Retreat Further
Residential heating oil prices fell for the fourth straight week during the period ending February 9, 2009. The average residential heating oil price dropped 3.0 cents per gallon last week to reach 235.9 cents per gallon, which was 94.6 cents per gallon lower than this same time last year. Wholesale heating oil prices fell by 8.9 cents per gallon to reach 147.5 cents per gallon, a decrease of 118.4 cents per gallon compared to the same period last year.

The average residential propane price shaved 0.3 cent per gallon off last week's mark to reach 232.1 cents per gallon. This was a decrease of 23.1 cents from the 255.2 cents per gallon average for this same time last year. Wholesale propane prices shed 10.1 cents per gallon, falling from 96.4 cents to 86.3 cents per gallon. This was a decrease of 58.0 cents from the February 11, 2008 price of 144.3 cents per gallon.

Gasoline Prices Moving Up, Diesel Prices Still Sliding
The national average price for regular gasoline increased 3.4 cents to 192.6 cents per gallon. Over the past six weeks, the national average price has increased 31.3 cents; however, the price remains 103.4 cents below the price a year ago and 218.8 cents below the all-time high set on July 7, 2008. The East Coast price increased 3.6 cents to 191.2 cents per gallon. The Midwest was the only region where the price did not increase, but instead fell just six-tenths of a cent to reach 186.4 cents per gallon. The average price on the Gulf Coast increased 3.5 cents to 183.7 cents per gallon. Despite an increase of 6.8 cents, the average price in the Rocky Mountains remained the lowest in the Nation, at 178 cents per gallon. Advancing the most of any region, the average price on the West Coast shot up 9.3 cents to 217.5 cents per gallon. Despite a sharp increase of 10.2 cents, the average price in California at 221.5 cents per gallon was still 89.3 cents less than the price there a year ago.

For the fourth consecutive week, the national average price of diesel fuel dropped. With the latest decrease of 2.7 cents, the national average price slipped to 221.9 cents per gallon, 106.1 cents below a year ago, and 254.5 cents below the all-time high set on July 14, 2008. Diesel prices fell in all regions of the country. The price on the East Coast slipped 2.9 cents to 229.6 cents per gallon, remaining the highest among the regions but 102.8 cents less than last year. The price in the Midwest fell 2.8 cents to 217.3 cents per gallon. Falling 3.3 cents to 215.6 cents per gallon, the average price in the Gulf Coast fell the most on a regional basis and remained the lowest price of any region. The price in the Rocky Mountains fell 1.8 cents to 221.1 cents per gallon. The price on the West Coast slid 1.1 cents to 229.2 cents per gallon, 105.5 cents below a year ago. The average price in California dipped 1.9 cents to 226.9 cents per gallon.

Propane Inventory Draw Slows
Warmer temperatures contributed to slow the sharp drop in propane inventories seen over the last several weeks, with inventories dropping by 1.4 million barrels to settle at an estimated 43.2 million barrels as of February 6, 2009. Although overall temperatures were only slightly colder-than-normal during January, most of the major propane consuming areas were much colder-than-normal, leading to the relatively sharp declines seen during the month. However, as temperatures moved higher during early February, the pace of inventory withdrawals slowed considerably. Both the East Coast and Midwest regions reported inventories nearly flat for the week, while the Gulf Coast was the only region with a major decline which totaled 1.3 million barrels last week. The combined Rocky Mountain/West Coast region slipped lower by 0.1 million barrels during this same time. Propylene non-fuel use inventories fell 0.3 million barrels last week and accounted for a slightly less 7.6 percent of total propane/propylene inventories from the prior week’s 8.0 percent share.

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