Oil and gas prices are affected by a number of factors that include weather conditions, worldwide supply and domestic production levels. The price of gas and oil reserves are a reflection of the supply and demand pressures for a given time frame. When the demand for crude oil products is high, prices adjust to maintain supply levels for the future in consideration for current production levels. When prices are high, production is encouraged to increase supply levels and decrease the price of oil products.
A harsh winter or a relatively temperate winter can affect the demand for oil and gas. Weather is considered to be a demand-side factor affecting prices, because weather can alter the way people use gas and oil.
How Winter Weather Alters Oil and Gas Usage
When a winter is abnormally cold, the demand for oil increases because homes need to use more natural gas to maintain their internal temperatures. If a winter is abnormally warm, as it may be for 2015 in the United States, then the demand for heating will decrease and less gas will be needed to heat homes.
2015-2016 Winter Energy Consumption Forecast
The U.S. Energy Information Administration (EIA) has released predictive information for the winter of 2015-2016, along with the history of the consumption rates of natural gas and heating oil for past winters.
Close to 59 million homes use natural gas, making it the most commonly used heating agent in the U.S. Natural gas consumption in the U.S. is expected to decrease during the winter of 2015-2016 by 7.1%, from an average of 64.8 gallons used last winter to 60.2 gallons used this winter. Expenditures by households are expected to drop 13.1% to $558 in the winter of 2015-2016.
Electricity is the second most commonly used heating agent in the U.S., with 47 million homes using electricity for heat during the winter. Electricity is provided by power plants that burn oil, coal and natural gas. The drop in the price of electricity for the upcoming winter will not be as significant as the drops seen in natural gas and heating oil prices, and expenditures are expected to drop by 3.7% across the U.S., from $960 to $924.
The EIA predicts that consumption of heating oil during the winter of 2015-2016 will decrease from the winter of 2014-2015 by 10.9%, from 2014-2015 consumption at a nationwide average of 610 gallons per household to the prediction of 543 gallons per household. Heating oil is the most expensive heating agent out of the three, as it produces the least amount of energy per unit.
Six million U.S. homes use heating oil to maintain temperatures. The average price per gallon of heating oil in 2014-2015 was $3.04, while this winter's projected price will be $2.50. The price drop can be attributed to high domestic production of crude oil in states such as Texas and Oklahoma. In conjunction with the drop in heating oil price, the total expenditures per household are expected to drop by 26.6%, from an average expenditure per household in 2014-2015 at $1,853 to expenditures for this year at $1,360.
Wintry Conditions Affect Oil Production
Cold weather can also affect oil production negatively if wintry conditions cause disruptions in oil production activities. If the temperatures drop low enough, operations cannot produce at full capacity. Poor traffic conditions caused by snow can also disrupt the transportation of oil products to storage facilities and to consumers. Crude oil has a freezing point of between -40 and -60 degrees Fahrenheit. If temperatures drop to these depths, as they did in North Dakota in 2013, the supply side of oil and gas prices will be affected.