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Lower heating oil prices are a positive for US households

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Nov. 20 2020, Updated 12:45 p.m. ET

Heating oil

Heating oil is a distillate fuel oil used for domestic heating and, in moderate capacity, in industrial burner units. Like gasoline and distillates, heating oil consumption or demand trends matter to refineries.

A higher demand for the fuel means bullish prices, which are a positive for refineries such as Valero (VLO), Marathon Petroleum (MPC), Tesoro (TSO), and Phillips 66 (PSX). All these companies are components of the Energy Select Sector SPDR ETF (XLE).

Last week, as of December 15, residential heating oil prices fell ~8 cents compared to the prior week, averaging $3.14 per gallon. Prices were 81 cents lower than last year for the same week.

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Much like natural gas and propane, heating oil sees accelerated demand in the winter heating season. This time, however, the National Oceanic and Atmospheric Administration’s (NOAA’s) projection of mild temperatures for the remainder of the winter is expected to minimize consumer expenditures on home heating compared with last winter.

Last winter, US population‐weighted heating degree days (or HDD) were an estimated 18% higher than the previous ten-year average for November, according to the EIA.

Impact on prices

Apart from the NOAA’s mild weather forecasts, as a result of falling crude prices, US heating oil prices are expected to average 20% lower than last year, at $3.09 per gallon this winter. This will also help lessen household heating oil expenditures by 27% ($632) compared to last winter, according to the EIA.

Plus unlike natural gas, heating oil prices are tied to crude oil. If crude prices continue to drop, and if weather forecasts hold true, the price of heating oil could fall further. While this is good news for US residents, falling oil prices aren’t good for the US energy complex.

For our analysis of recent commodity prices and their effects on energy companies, check out our Energy and Power page.

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