EIA expects higher US winter fuel costs: Update

Adds outlook on propane, details from EIA briefing.

An expected return to more normal winter weather will boost average US natural gas and heating oil costs by double digits in the winter 2016-17 over the previous winter, the US government energy forecaster said.

US households using natural gas for heating — about half of the population — will see their bills rise by 22pc on average from the unusually warm winter 2015-16, the Energy Information Administration (EIA) said today in its Winter Fuels Outlook. The EIA defines the winter heating season to last from 1 October to 31 March.

The EIA projected that natural gas use for heating would rise by 10pc and it expects prices of the fuel to climb by 11pc on the year-over-year basis. Natural gas prices are expected to rise by 13pc in the northeast and 14pc in the midcontinent.

The price forecast represents the expected prices paid by the consumers, rather than wholesale prices. Utility costs typically lag behind spot prices. The projected winter natural gas heating costs are the highest since winter 2010-11.

US natural gas futures prices in March collapsed to a 17-year settlement low below $1.65/mmBtu following an unusually mild winter that left inventories at a seasonal record. But US natural gas prices at key hubs already have rebounded from lows marked earlier this year as that fuel displaced coal for US power generation.

Natural gas prices at Algonquin Citygates, a New England hub, averaged $2.60/mmBtu in September, up from $1.87/mmBtu in March. Chicago Citygates prices, in the midcontinent, rose to $2.89/mmBtu from $1.79/mmBtu at the end of the winter 2015-16 heating season.

The northeast US is the highest-priced market in winter time and the only US region where LNG tanker deliveries can compete both with domestic supply and with other global markets. But additional natural gas delivery infrastructure built in recent years has reduced the northeast US price differentials with the Gulf coast. Spectra Energy's 330mn cf/d (9mn m³/d) Algonquin Incremental Market project should start service in November, with the potential to alleviate supply constraints on the coldest winter days.

The northeast US also has the highest proportion of households relying on heating oil, and the EIA expects those families to pay 38pc more this winter compared to last. It expects the heating oil prices to be up by 20pc on the year-over-year basis while demand should increase by 15pc.

The price forecast reflects the EIA's projected $48/bl Brent price for the October-March period, which would be 23pc higher than in the previous winter season. Distillate stocks in the northeast as of 30 September were 15pc higher than a year earlier.

The EIA projects that propane prices in winter 2016-17 would increase by 7pc in the northeast and 14pc in the midcontinent, from the previous winter. US propane inventories, at 104mn bl at the end of September, were 4pc higher than a year earlier, but most of that excess is in the Gulf coast storage facilities. The inventory is sufficient for meeting higher-than-normal demand for propane both for heating and for exports.

The high inventory and improved rail delivery networks should prevent a supply shortages and price spikes that occurred in winter 2013-14, the EIA said.

Homes that rely on electricity for heating, primarily in the southern US, will see a more moderate 5.4pc increase in heating bills, the EIA projects. Residential electricity prices have longer lag periods behind spot power prices, which in turn move in tandem with natural gas. Families reliant on electricity for heating will not see higher bills until 2017.

The EIA winter fuels forecast reflects predictions by the US National Oceanic and Atmospheric Administration, which expects heating demand in the US to rise by 13pc from the previous winter. The winter 2016-17 season still should be 3pc warmer than the 10-year average, according to the US forecasters.