State Heating Oil & Propane Program Final Report Winter 2010/11

Transcription

1 Massachusetts Department of Energy Resources 100 Cambridge St. Suite 1020 Boston, MA State Heating Oil & Propane Program Final Report Winter 2010/11 August 2011 Deval L. Patrick Governor Timothy P. Murray Lt. Governor Richard K. Sullivan, Jr Secretary, EOEEA Mark Sylvia Commissioner

2 INTRODUCTION The 2010/11 Winter Heating Season marks the18th year of the Massachusetts Department of Energy Resources (DOER) participation in the U.S. Department of Energy's annual State Heating Oil and Propane Program (SHOPP). SHOPP requires states to collect and monitor retail heating oil and propane prices from October through March. SHOPP augments existing DOER data collection efforts and serves several important purposes. The information provides policy-makers with timely, accurate and consistent data to monitor current heating oil and propane markets and develop, when necessary, appropriate state responses to potential fuel problems. The information also helps the federal and state governments respond to consumer, congressional and media inquiries regarding heating oil and propane. The SHOPP report summarizes the results from the Massachusetts retail heating oil and propane price surveys, including supply and demand events that affected those markets. Also included are a seasonal overview and a summary of how the SHOPP program is used to augment DOER functions. Findings Prices Start Season on Par with Previous Winter Crude Prices Rose $24 Per Barrel During the Season Winter Weather Colder Than Normal A Tale of Two Inventories to Start Season Prices End at Winter Record Levels SHOPP Data Used To Support DOER Activities Prices Start Season on Par with Previous Winter After two seasons of volatile prices, the 2010/11 heating season started off only 4 cents above where the previous season ended. Heating oil opened the season at $2.90/gallon, 17% above the 2009/10 opening price of $2.47. Propane opened the heating season at $2.71/gallon, 13% more than 2009/10 s $2.40/gallon. While crude oil prices did not match the all-time high of $145/barrel from summer 2008, prices did rise substantially over the course of the winter resulting in increasing winter fuel prices. The following section highlights what crude prices did during this past heating season. Crude Prices Rose $24/Barrel During the Season In the first week of October 2010, crude oil prices (as measured by WTI spot prices) averaged $78.41 per barrel, a decrease of about $2 per barrel since 1

3 March 2010, the end of the heating season. However, it represented a $10 per barrel increase compared to the previous October. Crude prices rose steadily over the 2010/11 heating season. Although spot crude prices in October averaged about $81 per barrel, prices reached a seasonal peak of $102 per barrel by March That $24 per barrel increase over the heating season translates approximately into a $0.60 per gallon increase in petroleum product prices. (For every $1 increase in crude prices, there is an approximate 2.5 cent per gallon product increase.) The graph below shows the weekly WTI spot prices for the 2010/11 heating season with a comparison to prices during the 2009/10 season. Figure 1: WTI Spot Crude Oil Prices October Crude oil prices were $78 per barrel at the start of the month, but slowly climbed to $82 per barrel by the end of October. A couple of factors kept pressure on oil prices to move upward. Although there were prospects of a slow U.S. economic recovery and weak U.S. demand for petroleum products, the falling value of the dollar against other currencies was one factor. (The weaker dollar makes crude cheaper for buyers in other currencies, but pushed crude oil futures prices higher.) China s growing economy and increased demand for petroleum products was another factor. For example, the publication, Peak Oil Review, stated that, Reports from China say the domestic auto industry is surging. A GM executive forecast that auto sales could reach 17 million vehicles this year and 19 million next up from 13.7 million in This assessment is backed by other foreign companies selling cars in China who report robust sales as more and more Chinese incomes cross the threshold that makes 2

4 car ownership feasible. The government has also been offering incentives to boost car sales. All this suggests that China s demand for oil will continue to increase for the foreseeable future as auto ownership grows at an unprecedented pace and the GDP continues to increase in the 8-9 percent per annum range. China's apparent oil demand in September rose 5.1% year on year to million tons or an average of 8.68 million b/d. Demand in the first nine months of the year totaled million tons or an average of 8.52 million b/d, up 10.25% from the same period of Chinese refiners processed 310 million tons of crude from January to September, 13.4 percent higher from a year ago. Crude imports in September hit a new historic high of million tons, or around 5.7 million b/d. Another event that sent jitters in the oil markets was a French labor union strike over pension modification. At one point in October, fifty-three ships had been stranded by a strike at France s Fos-Lavera oil terminal. As the strike continued, 12 refineries shut down. During the month, French labor unions called for the strike to be extended to other ports. France experienced gasoline shortages causing the country to import gasoline from other countries. The strike led to uncertainty in the oil markets about petroleum supply dislocations in Europe. During October, the IEA revised its projections for global oil demand in 2010 and 2011 upwards by 300,000 bls/d to an average of 86.9 million bls/d and 88.2 million b/d respectively. Also, the IEA estimated that global oil production fell slightly in September. In the meantime, OPEC left its global production targets unchanged. November Crude oil average prices rose to $87 by mid-month, but receded to $82 by month s end. By beginning of November, France s oil port strike was over and oil product distribution got back to normal. Even so, markets got another boost when the Saudi Oil Minister Ali Al-Naimi said that his country was comfortable with oil prices as high as $90 a barrel vs. the previous top of $80. (Other OPEC nations thought that $100 per barrel was tolerable.) That statement and the OPEC ceiling on production kept prices high. Also, many of the same factors in October carried over into November. For example, China and Asian petroleum demand was still strong. There were reports that China was experiencing diesel fuel shortages. This led to belief that China would continue to significantly import product. In addition, markets watched U.S. crude oil stocks which had been at record levels start to decline leading some to believe that petroleum demand had picked up. Figure 2 illustrates stock movement over the heating season. 3

5 Figure 2: US Crude Oil Stocks Source: EIA, This Week In Petroleum, May 4, 2011 December Throughout this month, crude prices rose to reach $91 per barrel by end of December. There were scattered reports that the U.S. economy was improving and leading to more petroleum demand. Also, cold weather had set which increased petroleum product demand for heating. Wall Street Investment houses such as JPMorgan were predicting that oil would reach over $100 and up towards $ per barrel by the next year. On the global market, OPEC was saying that oil markets were well supplied and did not increase production quotas. January During January, crude prices remained about $90 per barrel. Several incidences influenced crude oil prices. In the U.S., the Trans-Alaska pipeline system, which transports oil from the Prudhoe Bay field, was closed following the discovery of a leak. The pipeline transports about 15% of the U.S. crude oil production. There were fears that a prolonged shut down would cause supply problems on the West Coast, thus the shut down drove up crude oil prices. Political unrest and demonstrations took place in Tunisia, Egypt and other Middle East countries. There was concern if the protests affected oil-producing countries they could slow or halt oil production. Also, some analysts and commentators began to highlight the idea that speculation in oil commodity futures markets not market fundamentals were causing oil prices to remain high. 4

6 February During February, crude oil average weekly prices started at $90 per barrel, dipped to $85 per barrel then shot up to $95 per barrel. OPEC continued to say that the oil markets were currently adequately supplied and that it would not increase production. OPEC insisted that very cold weather resulting in increased demand and speculation in oil futures markets were the reason for crude oil price increases, not OPEC s policy to maintain quotas. There were several influences that caused oil prices to dip and rise in February. There was concern that there would be disruptions to oil traffic through the Suez Canal as the protests in Egypt continued. However, after a couple of weeks of anti-government demonstrations, Egypt s Egyptian President Mubarak stepped down and there appeared to be little danger of a Canal shut down. After the announcement, oil prices dipped mid-month. However, world oil market observers continued to watch to see if the uprisings Egypt and other countries would spill over into oil-producing Middle East. There were in demonstrations in Algeria, Kuwait, Iran, Bahrain, Iraq, Yemen, Oman, Sudan, and even a small one in Saudi Arabia. The most disruptive for oil markets was the one in Libya which resulted in civil war. President Obama and the Saudis assured the markets that the shut-in Libyan crude would be replaced with increased OPEC production and withdrawals from strategic reserves. Some market observers started to question whether or not OPEC had as much spare capacity, 4-6 million barrels per day, as thought and if oil markets could quickly replace the 1.7 million barrels per day of lost output of Libyan oil. As the political uprisings in the Middle East continued, there was major worldwide concern about the political stability in Saudi Arabia, with its 9 million barrels per day of production. In an effort to quell dissatisfaction, the Saudi King announced a package of financial support worth about $36 billion including a 15% pay raise for public employees in an effort to avoid what happened in Egypt and Libya. March WTI crude oil average weekly prices hit over $100 in March and remained about $105 per barrel. Throughout the month Libya experienced heavy fighting between insurgents and Gadhafi s troops and oil exports from the country continued to decline. The UN voted to use military force to prevent the Gadhafi government from using force against civilians. This situation and the uncertainty about political uprisings in the Middle East and possibilities of future supply problems in the region kept oil prices high. Another tragic incident that affected crude prices was the 9.0 earthquake and subsequent tsunami that engulfed much of northern Japan. Several Japanese refineries were closed, along with a forced shutdown of nuclear reactors. 5

7 Leaking radioactive materials from Japan s damaged nuclear reactors was at a crisis level. There was speculation that the disruption to Japan s economy could cause less demand for world oil. On the other hand, with their refineries and nuclear reactors down, Japan might have to import more petroleum products as recovery efforts got underway and they needed to produce electricity. Winter Weather Colder Than Normal Traditionally, weather is one of key components impacting heating fuel demand. Warmer weather usually translates to lower demand and prices while colder weather translates to higher demand and prices. The previous winter was about 6% warmer than normal. Early season forecasts from the National Oceanic and Atmospheric Association (NOAA), predicted Massachusetts and the rest of New England had an equal chance for normal, above normal, and below normal temperatures. Overall, temperatures for the 2010/11 winter were 2% below normal for Massachusetts. Figure 3 highlights the heating degree days since 2003 compared to normal temperatures. Figure 4 shows the monthly heating degree days average since Figure 3: Heating Degree Days 6

8 Figure 4: Heating Degree Days Heating Degree Days (Boston, MA) The heating season began with October-November experiencing warmer than normal temperatures. However starting in December colder and snowier weather moved into Massachusetts and temperatures stayed below normal until March. Overall the winter was 2% colder than normal and 8% colder than previous year. Table 1 shows the winter heating degrees and the deviation from normal since Table 1 Massachusetts HDD Actuals thru March 2011 Season Current Winter Oct Nov Dec Jan Feb Mar Oct Mar winter vs 2003/ % 2004/ % 2005/ % 2006/ % 2007/ % 2008/ % 2009/ % 2010/ N/A Normal % 10/11 % Chg vs Normal 11.11% 1.00% 6.51% 5.87% 3.10% 0.00% 2.14% % Chg vs Last Yr 19.19% 23.40% 2.87% 8.47% 9.03% 24.62% 8.62% 7

9 A Tale of Two Inventories to Start Season In addition to crude prices and weather, inventories are a key component in winter fuel prices. Low inventories can lead to shortages which lead to price spikes. Conversely, high inventories can help dampen prices by providing excess product. This heating season, inventories for both fuels started below last season s levels. Heating oil stocks remained stable but propane stocks experienced significantly lower inventories in the beginning of October due to off season storage issues that reduced stocks and carried over well into heating season. Heating Oil New England Heating oil stocks started the heating season 10% below last year s level and ended the heating season at 16% below last year. Figure 5 shows the comparison to last winter. Figure 5: New England Heating Oil Stock Levels Source: US EIA This Week in Petroleum Web Report (October 2010-March 2011) While stocks were lower than last season overall, heating oil was coming off a five year high in stocks, making the decrease insignificant in terms of pricing. The biggest dip occurred in Jan-Feb when repeated snow storms and inclement weather caused transporting delays both in shipping and on-road transportation. Propane Propane stocks in New England are just in time inventories with limited storage. While heating oil stocks started the season slightly below the

10 levels, propane started a whopping 83% below This sharp decrease in stocks was largely due to a series of planned and unplanned issues in the storage system that occurred in the off-season. First, the propane terminals in Providence were shut down for 20 year mandatory maintenance. This meant no stocks could be stored there until it reopened in September. Providence is one of the primary storage facilities in New England for propane. Then in August, the TEPPCO Pipeline, which services caverns in CT and NY, experienced an explosion further down the system and was shut down until December. That meant that only supply on hand would be available when the season started. Finally, the other port terminal in New Hampshire, had trouble getting ships due to higher prices overseas, which meant suppliers would head over there first. Propane is largely shipped in from Algeria and the surrounding area, meaning that the US and New England competes with the world market for propane. All of these issues led to lower stocks entering the season. Furthermore, shipping issues meant Providence did not get any supply in until late October and November. At one point in October, New England had only 39,000 barrels of propane. Figure 6 illustrates the volatility in this year s stock in comparison to last year. Figure 6: New England Propane Stock Levels Source: US EIA This Week in Petroleum Web Report (October 2010-March 2011) Fortunately, once Providence got its first shipment and then TEPPCO reopened and stocks rebounded, and at one point were substantially higher than the previous season. Propane ended the season 5% higher than last winter. Prices End at Winter Record Levels Prices for heating oil and propane started the season 17% and 13% above last year s beginning prices, respectively. One interesting note is that heating oil entered the season 4 cents above the end of the previous heating season while 9

11 propane actually fell 25 cents from the end of the 2009/2010 heating season. However this stability was short-lived and prices began rising immediately, ending with record high season average prices for both fuels. Heating Oil Prices began the heating season 17% higher than last season at $2.90/gallon. Prices started rising immediately and by the end of December, the weekly average was up 42 cents to $3.32/gallon. This rise followed along with the higher prices for crude oil in that time span (from $78/barrel to $91/barrel) and colder weather than the previous year. Despite a short respite in rising crude prices in January and early February, by March crude prices had hit $105/barrel as unrest gripped the Middle East. Heating oil prices followed suit and ended the season at a winter survey record of $3.90/gallon 1, 36% higher than in Figure 7 illustrates the prices for the past two heating seasons. Figure 7: Mass Heating Oil Prices Source: DOER Weekly Winter Price Surveys October The season average price for heating oil was a record $3.32/gallon, 20% higher than last season s $2.77/gallon. The previous season average record was $3.24/gallon in the 2007/2008 season. Examining prices over the past decade shows mostly a steady rise with prices peaking first in 2007/08 season, falling back as the Great Recession set in and now rising again as global demand and political unrest in oil producing states increases. Figure 8 illustrates the average season price since 1999/2000 heating season. 1 The all time recorded high was $4.71/gallon in July of

12 Figure 8: Average MA Heating Oil Price 1999/ /11 Source: DOER Weekly Winter Price Surveys October Based on an estimated average consumption of 800 gallons a season from US EIA data and factoring in average winter weather, the average consumer spent about $ in 1999/00 compared to $2656 this past heating season, an average bill increase of 171%. Propane Unlike heating oil prices, propane prices started the season 25 cents lower than the end of the previous heating season at $2.71/gallon. Even with the price drop the October 1 st price was 13% higher than October Similar to heating oil prices, propane rose steadily throughout the season though not as sharply as heating oil as natural gas prices remained low. Propane combines natural gas and petroleum products and the lower natural gas prices helped offset the rise in crude oil that drove heating oil prices. However, propane also ended the season at a winter survey high of $3.33/gallon, a propane survey record. This was 13% above the previous heating season s ending price. Figure 9 shows the prices for the past two heating seasons. 11

13 Figure 9: Mass Propane Prices Propane s season average of $3.06/gallon was 12% above last season s winter average and a season average record. As with heating oil, propane prices rose steadily since 1999; as illustrated in Figure 10. Figure 10: Average MA Propane Price 1999/ /11 Based on an estimated average consumption of 1000 gallons from US EIA data and factoring in average winter weather, the average propane consumer spent about $1330 in 1999/00 compared to about $3060 this past heating season, an average bill increase of 130% for the decade. Price Summary Prices for both heating fuels rose to record levels for both the season ending and overall season averages. Continued uncertainty in the crude oil markets pushed prices over $100/barrel and put pressure on all petroleum and 12

14 heating fuel prices. Colder than normal winter weather also contributed to higher prices and higher annual bills for consumers as consumption rose. Both heating oil and propane prices more than doubled since 1999, meaning consumers are spending substantially more for heating homes during the winter. SHOPP Data Used to Support DOER Activities One of DOER s most important functions is to provide accurate and timely information on energy prices and supplies to the government, media and consumers of the Commonwealth. SHOPP is a valuable asset to the data collection and price monitoring activities involved in this function. It enables DOER to provide information to policy makers who must act quickly in the event of an emergency. DOER collects and posts pricing information from the SHOPP surveys for heating oil and propane on our website, This information is updated weekly during the winter and monthly during the off-season. Numerous groups and consumers use these surveys to measure their prices against the state average price collected under SHOPP. One issue that arose with prices is that due to the number of propane companies now submitting prices directly to EIA, DOER does not have enough data points to continue the off-season surveys for propane this year. Hopefully, this can be corrected for next season. Consumers rely on DOER surveys to help them plan for their winter heating costs. DOER also uses the SHOPP information during the New England States and Energy Industry Conference Calls. From October through March, DOER staff participates in weekly calls regarding the winter fuels situation. The calls are hosted by the New England Governors Conference (NEGC) and participants include energy offices in New England and New York; energy industry representatives including the Northeast Gas Association, ISO-New England; the U.S. Coast Guard, Massachusetts Petroleum Council, Propane Gas Association of New England (PGANE) and the U.S. DOE. Participants exchange data about heating fuels and electricity winter supplies and prices. These calls and the SHOPP information were particularly important this past heating season, as updates on propane supplies at the beginning of the season helped ensure that New England has enough propane supply. Later in the winter, DOER called SHOPP dealers on the survey to determine how the numerous snow storms (including two blizzards) were impacting delivery. At one point in February, Massachusetts joined other Northeast states in issuing driver hour waivers for propane and heating oil trucks to ease delivery issues. Other meetings attended by DOER that utilize SHOPP data include the Massachusetts Department of Housing and Community Development s (DHCD) Energy Advisory Meetings. As part of its duties under its management of the Commonwealth s Weatherization Assistance Program (WAP), DHCD holds quarterly meetings on its weatherization and Low-Income Home Energy 13

15 Assistance Program (LIHEAP), also known as fuel assistance. As a member of this group, DOER provides information on prices and supplies. DHCD briefs group members on the status of these federal programs including funds, allocations, and number of recipients. The SHOPP program is a critical component in DOER s mission to provide accurate energy price information to the Commonwealth and its citizens. Massachusetts residents traditionally endure long and cold winters and knowing what prices are as well as where they are headed is extremely important. For these reasons, DOER looks forward to its continued participation in SHOPP. 14