Millions of U.S. households were set back by a few hundred dollars per home in the first quarter of 2014 on account of the freak cold snaps that plunged the eastern half of the nation into a deep freeze.
With winter fast approaching, many are wondering if they’re going to have to budget another sizable heating expense in a few months’ time.
Well, we can all sleep a little more soundly this winter on the expectation of warmer temperatures and lower overall heating costs, as noted in the U.S. Energy Information Administration’s recent report on the upcoming 2014-15 winter season. Add to these warmer temperatures a recent plunge in fuel commodities like oil and gas and we may have a very happy and prosperous New Year to look forward too!
Snuggly-Warm Forecast
“Forecast temperatures are much warmer than last winter east of the Rocky Mountains with the Northeast, Midwest, and South about 11%, 16%, and 12% warmer, respectively,” the report eases our worries. “Forecast temperatures are 5% warmer than last winter in the West,” it adds, although most in the West including myself are never very anxious over winter weather reports to begin with. We go jogging in our shorts!
With warmer temperatures on the horizon, then, U.S. households can expect lighter heating bills. How much lighter? That depends on the fuel you use to warm your home. The EIA projects heating costs will be “5% lower for homes that heat primarily with natural gas, 15% lower for heating oil, 27% lower for propane, 2% lower for electricity.”
But of course, utility companies are none too thrilled with those predictions, which will result in lower sales revenues this Q1 over last year’s. So they’re going to make up for it another way… by raising prices.
“EIA expects higher prices this winter for homes that heat with natural gas and electricity,” the report tapers our glee. Although “propane and home heating oil prices are expected to be lower than last winter.”
Hence, to make up for lower energy demand, utilities are getting ready to raise their prices, at least for natural gas and electricity. However, consumers are still expected to pay less this winter despite higher prices per unit of measure, since they will be using fewer units of energy overall.
Ripple Effect Should Boost Q4 and Q1 Earnings
This should bode well for businesses in Q4-2014 and Q1-2015 as compared to last year’s similar quarters, since households will have some extra money to spend.
If just 50 million households (there were 115 million households in the nation in 2012) save just $100 a month on heating, an extra $5 billion a month would be saved and ultimately pumped into the economy through shopping, resulting in a very profitable holiday shopping season that would continue well into the first quarter.
But there’s even more money expected to find its way into cash registers this winter, thanks to gasoline prices that have fallen some 5% to 10% over the past several weeks, as noted in the graphic below.
Source: EIA
“The recent decline in gasoline prices has put an additional $50 billion in personal disposable income into the pockets of U.S. households, which should boost spending heading into the holiday shopping season,” quantifies an October 15th report by McGladrey, a provider of assurance, tax and consulting services.
“The net effect of lower gas prices and added consumer discretionary income should bolster the fortunes of middle market companies in the retail, food, beverages, fashion and home furnishings industries. It may also boost demand for durables and electronics, which would positively affect industrial products and technology sector companies,” the report reveals.
Investors could also expect the benefits to trickle down into their stock portfolios as early as the Q4-2014 reporting season in January-February, and again in the Q1-2015 reporting season from April-May, as the industries listed above report year-over-year increases in revenues, as well as increases in earnings as well (if they manage their businesses properly).
Yet there are other potential investment opportunities besides retailer stocks, such as the heating fuels themselves.
Natural Gas Price Forecasts
The U.S. Energy Information Administration is in a unique position to predict the future prices of fuel commodities, given its intimate knowledge of fuel consumption and production. The EIA’s most interesting projection is for natural gas.
“Record storage injections” of new supply has produced “an increase of … 4.5% over last winter,” the EIA reports. “Growing production and record storage injections this year helped lower the 2014-15 winter futures prices (Nov. 2014 – Mar. 2015 contracts) for natural gas at Henry Hub from almost $5/MMBtu in late April to near $4/MMBtu in recent trading.” Currently, those contract month prices range from $3.57 (November) to $3.68 (March).
“The projected Henry Hub [natural gas] spot price this winter averages $4.00/MMBtu compared with $4.52/MMBtu last winter,” the EIA adds, with the “Nymex Henry Hub natural gas futures price for delivery during January 2015” expected to average around “$4.19”.
Now let’s run a quick calculation. If natural gas prices are expected to rise to $4.19 this January, and the January contract is currently trading at $3.73, investors have the potential to gain 46 cents, or 12%, from natural gas over the next three months.
Yet EIA estimates the chances of natural gas going even higher than $4.19 by January are quite good, as noted in the graph below.
Source: EIA
As noted above, there is a 31% chance the price of natural gas will be above $4.50, a 14% chance it will rise above $5, and a 5% chance it will rise above $5.50 come this January. Yet even if these levels are not reached, that base-level of $4.19 is still quite attractive for a 12% gain over the next three months.
What is more, inventories for natural gas have been at the lower end of the previous 5-year range, as noted below.
Source: EIA
Let’s take a moment to grasp this graph. The previous 5-year range is noted in gray; the actual inventory from 2012 to present is noted in black; today’s place is marked by the vertical dashed line; natural gas’s future inventory is projected to the right of the vertical line in red (base case), with blue hashed lines marking where inventories would be if the weather were from 10% warmer to 10% colder.
As noted in early 2014 on the graph, the severe cold snap drew natural gas’ inventory level (black) well below the 5-year average (gray). While the same is not expected to happen this coming winter, it is important to note that inventories are continually being kept at the lower end of their 5-year average.
This means all we need is just one or two weeks of colder than expected temperatures, and natural gas along with other fuels will rise sharply – especially since everyone is expecting a warmer winter, with temperature projections having been lowered already.
So if you’re looking for ideas on what to do with all the extra money you’ll be saving from this warmer winter’s heating bills, after buying a few extra presents for your loved ones this holiday season, you might consider a little gift for yourself, perhaps a $100 out-of-the-money natural gas call option that could grow to $1,000 should natural gas reach its $4.19 projection come January, even more if it just keeps on climbing.
Joseph Cafariello
