Households heated primarily with heating oil or propane will likely pay more this winter

In our 2022 Winter Fuels Outlook, we expect that households using heating oil as their primary fuel for space heating will spend 27% more this winter than last winter (Figure 1). Higher prices for heating oil, combined with higher heating demand due to colder temperatures, are increasing heating costs. We also expect that households in the Northeast, Midwest, and South using propane as the primary fuel for space heating will spend 5% more on average this year than last year. The average household winter energy expenditures discussed here are broad measures for comparing recent winters and reflect energy expenditures for all uses, not just heating.

We define the winter heating season as October through March. Based on the September 15, 2022, weather forecast from the National Oceanic and Atmospheric Administration (NOAA), we assume temperatures for the winter of 2022–23 in most of the country will be slightly colder than both last winter and the average of the previous 10 winters. We use heating degree days (HDDs) as a measure of how cold temperatures are compared with a base temperature—more HDDs indicate colder temperatures and higher demand for space heating. On average, we expect 6% more population-weighted HDDs for the winter of 2022–23 across the United States than last winter and 2% more than the previous 10-winter average.

We expect that the 4% of U.S. households that use heating oil as the primary space-heating fuel (mostly in the Northeast) will spend about $2,354 on average this winter, up 27% from last winter. We forecast that the average household will consume 519 gallons of heating oil this winter, up 9% compared with last winter, because of the colder temperatures. We forecast the retail price of heating oil will average $4.54 per gallon (gal) during the winter of 2022–23, up 16% from the previous winter.

Higher heating oil prices are partially driven by low distillate inventories (which includes heating oil and diesel fuel), which are driving up wholesale prices (Figure 2). We expect low inventories to continue through winter 2022–23. At the end of September, distillate fuel inventories in the Northeast were 14.7 million barrels, 57% lower than the five-year (2017–21) average for that week and 48% lower than at the same time last year. Although we don’t forecast distillate inventories in the Northeast, it is likely they will follow our broader East Coast forecast trend.

Although refineries on the East Coast are running at high utilization, regional refining capacity is at its lowest in recent history. In 2019, the Philadelphia Energy Solutions refinery shut down permanently following a fire. From January through September 2022, while utilization of existing capacity was high, net production of distillate fuel oil by East Coast refiners was only 76% of the five-year average.

Low international distillate inventories suggest that the potential for imports from international markets may be less than in previous years. Imports of distillate fuel into the East Coast in the first half of 2022 (1H22) were down 40% from 1H21. Prior to Russia’s full-scale invasion of Ukraine in February, Russia was a leading supplier of distillate fuel to Europe. U.S. and UK sanctions on Russia, and the independent choices of private sector companies not to trade with Russia, have reduced distillate supplies coming from Russia.

In addition, demand for distillate fuel in Europe’s electric power sector has increased because of record-high natural gas prices in Europe, which is further tightening Atlantic Basin distillate markets. Some European markets use distillate fuel for power generation if prices of natural gas or coal become uneconomical or if supplies of those fuels are unavailable. As a result of efforts to limit imports of natural gas from Russia, the indefinite closure of the Nord Stream pipelines, and the upcoming implementation of the EU’s import ban on Russia’s petroleum products in February 2023, the potential for increased fuel switching from natural gas to distillate presents a greater source of price uncertainty than in previous years.

About 5% of all U.S. households use propane as the primary space-heating fuel. We expect households in the Northeast, Midwest, and South that use propane will spend 5% more this winter than last winter. We forecast that households in the Northeast will spend 8% more this winter than last winter. Our forecast increase in Northeast expenditures for propane-fueled heating is based on our forecast that the region’s propane prices will be 4% higher and there will be 4% more household propane consumption, on average. We expect households in the Midwest to spend 5% more than last winter, reflecting a forecast 4% increase in propane consumption while prices are expected to be nearly the same. In the South, we expect households to spend 4% more than last winter, reflecting an average 7% increase in consumption that is partially offset by a 3% increase in propane prices.

As of September 30, the propane spot price at the Mont Belvieu Hub, near Houston, was down 38% (55 cents per gallon) from the same time in 2021 (Figure 3). Last winter, high winter heating demand and increased global demand for propane contributed to low U.S. propane inventories and high propane prices. In March 2022, the propane spot price reached its highest inflation-adjusted price since February 2014. Since March 2022, the wholesale propane price has steadily decreased to less than $1.00 per gallon.

Despite colder weather, we expect relatively unchanged total U.S. propane demand this winter compared with last winter. Increased propane use for space heating and petrochemical production offsets lower agricultural demand for propane-fueled grain drying because of low precipitation this year, allowing it to dry in the fields.

At the end of September, U.S. propane (including propylene) inventories were at the five-year average, but 14% higher than at the same time last year, at 84.4 million barrels. At the end of September, inventories in the U.S. Gulf Coast (which account for about 55% of all U.S. inventories) were 3% higher than the five-year average, and inventories in the Midwest (which account for about 29% of U.S. inventories) were 9% below the five-year average. Inventory levels in the Northeast were above their five-year averages by 3% (Figure 4).

Propane inventory builds in the United States, and particularly on the Gulf Coast, were limited this summer because of global propane market dynamics. U.S. propane exports averaged 1.4 million barrels per day (b/d) during the first seven months of 2022, the most on record for that period. Global demand of U.S. propane was high because of rising demand in the petrochemical sector.

We forecast that propane inventories will remain below the five-year average, but the gap between the current inventory level and the five-year average will likely not widen significantly further during this heating season.

We forecast U.S. propane exports this winter will be higher compared with last winter because of high global demand for propane as a petrochemical feedstock as well as higher exports to Europe for winter heating. Propane from inventories in Western Canada, which are near the five-year average, are increasingly being exported from two marine terminals, which may limit the quantity of propane available for the United States to import into the Midwest.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.