Energy Alert for July 15, 2015

Though it’s July, it’s not too early to start thinking about this coming winter’s heating costs. Depending on how you heat your home or business, you might be able to lock in a favorable fuel price from your supplier or simply stock up at a time when prices are low.

Heating costs are difficult to forecast because the weather is erratic. You never know if you’re going to get hit by the sort of Arctic blasts that raked the Northeast over the last couple winters, or if Mother Nature is going to keep the thermostat on “warm,” as happened in many places in the drought-stricken West. Energy markets can be even more unpredictable than the weather, especially if a cold snap arrives when supplies of natural gas, heating oil or propane are stretched thin.

That was the case in the Northeast two winters ago, when a series of “polar vortices” sent temperatures plummeting when stocks of natural gas were already low and suppliers were having trouble delivering enough oil and propane to customers. (Take a glance at the history of residential propane prices; the spike in early 2014 is impossible to miss.) That resulted in hefty heating bills for plenty of folks.

So, how are things shaping up this year? The answer depends on what kind of fuel you burn for heat (or whether you rely on electricity for heating, as many homes and businesses do).

First, consider natural gas, which heats about half of American homes. Gas prices have mostly been cheap in recent years, thanks to the advent of hydraulic fracturing and horizontal drilling in gas-rich layers of shale, such as the Marcellus Shale in Pennsylvania. But prices can still jump when winter weather turns frigid, especially in markets such as Boston and New York City. The spike depends to a large extent on how much gas energy companies saved up in underground storage during the preceding summer.

This year, storage facilities aren’t exactly overflowing, but they’re not low, either. The Department of Energy reports that gas in storage is about 2% higher than average for this time of year, and well above last year’s level. So the risk of a supply squeeze and resulting price jump is somewhat remote.

How about heating oil? Users will be glad to know that stocks of distillate fuel oil — including diesel and heating oil, its close chemical cousin — are actually higher now than they’ve been during the last few summers. And the big drop in crude oil prices from last year means heating oil is far cheaper today than it was a year ago. New York state’s energy department says the fuel is a buck per gallon cheaper now than it was a year ago in the Empire State. Ditto in Massachusetts. Prices should even slip a little bit more in coming weeks, meaning that oil users who have a chance to fill their tanks to the brim before cold weather arrives should consider doing so.

Propane users are really in luck. Stocks of propane held in storage are already at the highest level on record, and they’ll only keep rising throughout the summer, when demand is low. Producers eager to find more buyers are exporting record amounts of U.S. propane, but even that won’t be enough to avoid a glut come fall. Prices are already slipping and are almost certain to head lower over the course of the summer. So again, stock up by fall and keep an eye out for long-term supply contracts sporting favorable prices. We figure the average residential cost of propane will be about $2 per gallon or less this October (down from $2.30 per gallon last March), with the lowest prices along the Gulf Coast and in the Midwest, and the highest prices in the Northeast.

For electric heat, figure on paying more for each kilowatt-hour. Electricity rates rose by roughly 3% last year over 2013, and we expect rates to nudge higher still in 2015 and 2016. The retirement of many coal-fired power plants due to tougher environmental regulations means higher costs for utilities and more reliance on natural gas. (In fact, gas provided more electricity than coal this past April, for the first time ever.) If the winter of 2015-16 proves to be another frigid one, electric rates are bound to rise as power plants compete for gas with the many homes and businesses burning gas for heat. That’s a particular concern for the gas-dependent Northeast.

Geopolitical Turmoil Kneecaps the Oil Market

A quick note on the recent tumble in oil markets, which saw the U.S. benchmark West Texas Intermediate (WTI) slide from about $60 per barrel to $52 in a matter of days. That marked a sharp reversal of the upward trend prices had been on since early spring.

Fears stemming from Greece’s seemingly interminable debt crisis certainly contributed to bearish sentiment and pushed the euro down against the dollar. (Since oil is priced in dollars, a stronger dollar weighs on the price of crude). And on Tuesday, the announcement of a deal between the U.S. and Iran over the latter’s disputed nuclear program raised the prospect of embargoed Iranian oil returning to global markets.

But don’t get too hung up on Greece or Iran. The real story is China, and its seesawing stock markets. China is a massive buyer of all industrial commodities, including crude. Any concern that a stock market swoon might ding its already slowing rate of economic growth also raises fears that the country might buy less oil. Stephen Schork, editor of energy investment newsletter The Schork Report, suspects that Chinese oil imports are poised to slow now that the country is largely done filling its emergency crude oil reserve.

We see oil prices struggling in the near term. WTI might claw its way back to $60 per barrel by the end of summer, but it’s unlikely to rise much more than that, and figures to retreat once the summer driving season ends. How much is hard to say, but we lean toward a price in the low- to mid-$50 range by late fall. That means drillers in the U.S. will have to push even harder to cut costs and make their operations more efficient as they ride out the latest geopolitical waves rocking the global oil market.