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 are of consequence to refineries.
A higher demand for the fuel means bullish prices, which is a positive for refineries such as Valero Energy (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 January 5, residential heating oil prices averaged ~$2.97 per gallon, ~$0.08 per gallon lower than last week and $1.05 per gallon lower than the price for the same week last year.
Much like natural gas and propane, heating oil sees an accelerated demand in the winter heating season. The National Oceanic and Atmospheric Administration’s (or NOAA) projection of mild temperatures for the remainder of the winter is expected to minimize consumer expenditures on home heating compared to last winter.
According to the U.S. Energy Information Administration (or EIA), the US population‐weighted heating degree days (or HDD) last year were an estimated 18% higher than the previous ten‐year average for November.
Impact on prices
Apart from the NOAA’s mild weather forecasts, falling crude prices will most likely see US heating oil prices average 20% lower this winter than last year’s $3.09 per gallon. According to the EIA, this will help lessen household heating oil expenditures by 27%, or $632, compared to last year’s winter.
Unlike natural gas prices, heating oil prices are tied to crude oil. The recent decline in crude prices has caused heating oil prices to fall as well.
For our analysis of recent commodity prices and their effects on energy companies, check out our Energy and Power page.