Home-Heat Prices Are Flaring Up

Winter's Chill to Bring Higher Bills for Oil, Gas

For the nearly 8 million U.S. homeowners who use oil for heat during the winter, distant political tensions and financial speculation on commodity markets will soon arrive on the doorstep.

Crude oil prices have soared about $10 in two weeks, briefly touching a record of $90 a barrel yesterday before dropping to $88.60. Although many oil analysts said that the fundamentals of supply and demand do not explain the rising prices, they say that at least some of those price increases would find their way into home heating bills.

"Heating-oil prices are determined by crude oil prices and refining margins, and that's why heating-oil prices will be higher this winter," said Eitan Bernstein, an oil analyst at Friedman, Billings, Ramsey.

Spot market prices for home heating oil are running at a record $2.32 a gallon, up 36 percent from $1.70 a gallon a year ago. That translates into teeth-chattering retail prices of $2.65 or more without taxes, according to local heating-oil dealers, who add that their big oil company suppliers are warning that prices are heading up further.

Last week the federal Energy Information Administration forecast that heating-oil expenditures would be $1,785 for the average U.S. household this winter, an increase of $319, or 22 percent, from last year. "The prices will ease off a bit as we go through the winter," said Guy F. Caruso, the EIA administrator. "But not a lot."

The news is somewhat better for most U.S. homeowners, 60 percent of whom use natural gas for heat. The EIA said that natural-gas expenditures could be about $891 for the average household, up $78, or 10 percent.

The only hope of avoiding a big bill: the weather. Forecasters from the National Oceanic and Atmospheric Administration are saying that, measured in terms of heating degree days, this winter will 4 percent colder than last but still 2 percent warmer than the average winter over the past 30 years.

"What's in store is significantly warmer-than-normal weather for much of the eastern two-thirds of the nation," said Ken Reeves, senior meteorologist and director of forecasting at AccuWeather.com. He attributed that to a combination of warmer-than-normal Atlantic Ocean waters and La Ni¿a, a phenomenon of cooler-than-normal temperatures in the tropical Pacific Ocean that causes dry weather.

The average temperature in the Washington area would be about 2 degrees higher than the 30-year average, Reeves said.

Mild temperatures over the past three weeks have already contributed to a buildup of natural gas in storage. Inventories rose to 3.375 trillion cubic feet, according to a U.S. government report on Thursday, or 2 percent short of the natural gas inventory record set a year ago.

The likelihood of an expensive winter for home heating-oil users, 80 percent of whom live in the Northeast, has prodded members of Congress to sound the alarm.

"Several years ago, people laughed at the prospect of $100 oil -- but no one is laughing now, least of all American consumers," said Rep. Edward J. Markey (D-Mass.), chairman of the Select Committee on Energy Independence and Global Warming.

Congress and the administration have budgeted $2.1 billion for the Low-Income Heating Assistance Program in fiscal 2007. Although that is the same as the initial amount budgeted for 2006, Congress approved an additional $1 billion in a supplemental bill. The program's average grant is expected to be $314 this winter.

Utility companies have appealed to customers to help cover costs for the poor. Dominion Resources published a newspaper ad promoting the $1 million it raised for its fuel-assistance program last winter. Displaying a photograph of a group of penguins, the ad said: "What do we do when it's cold? Huddle together, naturally."

As steep as home heating-oil prices are, they would be even higher if profit margins for oil refiners had not been squeezed in recent months. From record levels in the spring and early summer, the difference between wholesale prices of petroleum products and crude oil costs have dropped by two-thirds or more, FBR's Bernstein said.

Oil analysts also said that some relief could come from a decline in crude-oil prices in the coming weeks. Bernstein is forecasting a 20 percent drop, similar to the crude-oil price declines in each of the past three winters. At this time last winter, however, that decline was already underway.

"The surge in oil markets to $90 -- the mirror image of last winter's fall -- seems underpinned more by financial flows and political risk than by fundamental factors," Lehman Brothers said yesterday in a report titled "Frenzied Oil Futures Frustrate Fundamentals."

Lehman's analysts said they expect "a correction." But having failed to predict the latest increase, they hedged by saying that "several risks could push prices higher still."