Fuel Prices Continue to Plummet

Contractors are preparing for a mild summer with welcome prices.

The Energy Information Administration (EIA) predicts 2016 will boast the lowest U.S. oil and natural gas prices in more than a decade.

Crude oil, from which heating oil is refined, is set to average $34.60 per barrel in 2016, representing a steep drop from the $93.17-per-barrel average of 2014.

While most new homes are using natural gas or electricity for heating, there are still around 6 million homes in the U.S. — mostly in the Northeast — using heating oil as a primary means of space heating fuel.

Contractors who deal in heating oil also poised to benefit from lower prices.

SUMMER IS COMING

For contractors working with both heating oil and natural gas, mild temperatures have presented problems as this past winter was unseasonably warm. In fact, the contiguous U.S. (CONUS) had its 20th warmest winter on record in 2015, per the National Oceanic and Atmospheric Administration (NOAA). December temperatures alone were 6°F above average, and December was the only month in the 121-year period of record that has both the title of warmest and wettest month.

Luckily, the damp results from winter are quickly transitioning into a better outlook for summer.

“The transition from El Niño to La Niña is already underway,” said Chris Orr, certified consulting meteorologist. “As ocean temperatures become cooler across the Pacific Ocean, the jet stream will shift, impacting U.S. temperatures. The warmest air across the West will be confined to the Northern Rockies, where summer (June through August) temperatures will be up to 4° above normal. The area will be surrounded by slightly cooler temperatures that will extend south along coastal California.”

In that transition, La Niña is defined by unusually cold ocean temperatures in the eastern equatorial Pacific. El Niño is just the opposite — being defined by unusually warm ocean temperatures in the equatorial Pacific.

“Much of Texas will be hot, as well as parts of the Southeast,” continued Orr. “A broad area with temperatures 2°-3° above normal will cover the entire East Coast, the Gulf Coast states, and the northern Great Lakes.”

One note about the summer that Orr found interesting is daytime highs across the Great Plains and Midwest will be 1-2° cooler than normal.

“Overnight lows, on the other hand, will be 1-2° warmer than normal,” he said. “The tops of daytime thunderstorms over the Rockies will blow east, and the canopy of high clouds will trap heat at night, causing overnight minimum temperatures to be warmer than normal.”

HEAT UP THE SUMMER

Ken Williams, president of Scott Williams Inc. in Quincy, Massachusetts, said his company has a finite customer base that must be taken into account when preparing for any type of weather, from the mild to the extreme.

“We always prepare for the worst-case scenario and staff for the coldest winters and warmest summers possible,” he said. “That way, we are able to meet everyone’s needs in delivering heating oil and maintaining equipment.”

Steven Ohl, president of R.F. Ohl in Lehighton, Pennsylvania, said his company’s heating oil deliveries were down approximately 30 percent due to the mild winter.

“We did have a ‘weather hedge’ in place to provide protection from the warmer than normal winter season,” he said. “A weather hedge is a financial instrument that allows you to offset some of the losses of gallons that may happen during a lower than normal temperate winter season. Our HVAC installation and service revenue was up 55 percent from the 2015 winter season.”

Ohl is also investigating a weather hedge for the summer cooling season and is preparing for a normal summer where his company can continue to monitor its capacity for installations and service against the temperature forecast.

“We have seen a 30 percent increase in our HVAC installations during the first quarter of 2016,” he said. “People seem to be using money they might have spent on higher energy costs to invest in new HVAC systems. As we reach our installation capacity, we will adjust the margins to compensate for the increased demand.”

Williams said volumes were definitely off 25-30 percent this winter compared to previous seasons, but because his company also focuses heavily on air conditioning during the summer months, they have been able to rebound quickly.

“The economy is decent and stable right now, which is helpful,” said Williams. “Lower energy prices have people feeling they have a few more dollars to spend, and we are already busy with plenty of air conditioning calls.”

OIL OR GAS?

On a recent episode of the NEWSMakers podcast, Matthew Pillius, owner and CEO of Royal Class Service in New Windsor, New York, highlighted why he believes oil-to-natural-gas conversions have become a popular option for some contractors.

“Natural gas is a commodity, so there is no lock on its pricing, but it generally runs half the cost of a gallon of fuel oil, so there are front-end savings to it,” said Pillius. “Plus, the other value is, for single-family or multifamily homes, you can negotiate a budget with the utility company and spread out or level your expense for heating your space. One is not really able to do that with oil because its a commodity driven by all means, and the price today is definitely not the price tomorrow. Prices hit $5 a gallon around here back in 2008, and now you see it at around $1.50 a gallon. That is a wide swing, and natural gas is following that, but you can reach out to utilities and get a budget with it.”

The American Gas Association (AGA) estimates that more than half a million housing units in the Northeast switched from oil to natural gas for their primary heating fuel from 2000-2010. Williams said that lower prices are always better, but he has seen those conversions go down to near zero over the past couple of years.

“There is no reason to switch [from heating oil to natural gas] now from a financial standpoint,” he said. “Gas is nowhere near as clean as it purports to be, and heating oil is still a great option. The price difference was a huge reason for converting to natural gas, but that reason is now gone.”

Ohl has also seen less interest from customers in switching to natural gas from heating oil, and said his company is focusing in on growth through customer service, team leadership, and operational efficiencies.

SIDEBAR: MILD US WINTER REDUCES HEATING DEMAND

According to the U.S. Energy Information Administration (EIA): “Above-normal temperatures during the 2015-2016 winter were a key factor in lowering heating demand and winter fuel expenditures. The 2015-2016 winter (October through March) was 15 percent warmer than last winter, EIA said. Also, nationwide, the number of heating degree days was 18 percent lower than the previous winter and 12 percent lower than the National Oceanic and Atmospheric Administration’s (NOAA’s) forecast in September 2015.

Compared with the 2014-15 winter, propane and heating oil demand decreased 16 percent and 45 percent, respectively, and residential electricity demand decreased by 6 percent. This contributed to reductions in costs for the four most common heating fuels: natural gas, heating oil, propane, and electricity.

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