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Why do heating oil prices continue to fall?

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Nov. 20 2020, Updated 2:28 p.m. ET

Heating oil prices down

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.

Market Realist’s weekly crude inventory and price series, which can be found on the Energy and Power page, covers weekly changes in distillate inventories.

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

Last week, as of January 26, residential heating oil prices averaged less than ~$2.82 per gallon, ~$0.02 per gallon lower than last week and ~$1.36 per gallon lower than the price for the same week last year.

Heating oil prices are linked to crude prices. As crude prices began to fall late last year, so did heating oil prices, as you can see in the above graph.

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Much like natural gas and propane, heating oil sees an accelerated demand in the winter heating season. However, 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

In addition to the NOAA’s mid-winter forecasts, the EIA’s January Short-Term Energy Outlook (or STEO) forecasts that US heating oil prices are expected to average $2.90 per gallon this winter, which is 25% lower than last year. This decline is a result of falling crude prices. According to the EIA, this will help lessen household heating oil expenditures by ~33%, or $767, compared to last winter.

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

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