# Presentation: 214040

## Regional Propane and Heating OilResidential PriceShort-Term Forecasting Models

- Tancred Lidderdale, PhD
- Energy Information Administration
- April 28, 2005

## Propane and Heating OilResidential market shares

## Slide 3

## Slide 4

## Model Structure and Issues

- Residential consumption
- Inventories
- Wholesale price
- Residential retail prices

## Model Structure and IssuesRegional residential heating oil model

## Residential Consumption

- Used to weight regional prices to national average. Estimated as a function of:
- Number of houses using fuel as primary source of heat from RECS housing survey (winter and summer).
- Real residential price (winter and summer)
- Census district heating degree days deviations from normal weighted to Census region by households using fuel as primary heat (current month and one-month lag).
- Monthly dummies

## Residential ConsumptionStandardized beta coefficients

| Northeast residential heating oil consumption |  |  |
| --- | --- | --- |
|  | Estimated coefficient | Standardized Beta coefficient |
| Winter real price | - 0.0022 | - 0.472 |
| Summer real price | + 0.000039 * | + 0.008 |
| Heating degree days (HDD) deviations from normal | + 0.0119 | + 0.164 |
| HDD deviations prior month | + 0.0028 | + 0.038 |
| Winter number of homes | + 0.0187 * | + 0.358 |
| Summer number of homes | + 0.00095 * | + 0.018 |
| * Not statistically significant at the 90% confidence level. |  |  |

- Standardized beta coefficient = estimated coefficient x (_std. dev independent variable_)
- 		                                                     std. dev dependent variable

**Notes:**
Standardized beta coefficient =

	est. coeff. x (std. dev. independent variable)
		            std. dev. dependent variable

For a one standard deviation change in the independent variable, the predicted change in the dependent variable is Beta standard deviations

## Residential ConsumptionIssues

- Changes in survey frames lead to shifts in consumption series.
- Infrequency/standard error of RECS housing data.
- Price elasticity of demand larger than expected.

## Residential ConsumptionShift in consumption

## Residential ConsumptionRegression price series

|  | Propane
Demand | Winter Real Price | Summer Real Price |
| --- | --- | --- | --- |
| 1996M01 | 0.6405 | 62.20 | 0 |
| 1996M02 | 0.6015 | 62.94 | 0 |
| 1996M03 | 0.4464 | 64.89 | 0 |
| 1996M04 | 0.2796 | 0 | 66.05 |
| 1996M05 | 0.1550 | 0 | 63.20 |
| 1996M06 | 0.0805 | 0 | 58.68 |
| 1996M07 | 0.0786 | 0 | 56.09 |
| 1996M08 | 0.0972 | 0 | 55.91 |
| 1996M09 | 0.1443 | 0 | 59.97 |
| 1996M10 | 0.2162 | 0 | 65.53 |
| 1996M11 | 0.3513 | 66.91 | 0 |
| 1996M12 | 0.4617 | 68.26 | 0 |

## Residential ConsumptionRECS houses with propane space heat

- RECS – Residential Energy Consumption Survey (quadrennial)

## Residential ConsumptionRECS propane and heating oil shares

- Northeast Census District

## Residential ConsumptionRECS housing data

| RECS 2001 Homes using propane and heating oil as primary space heating fuel. |  |  |
| --- | --- | --- |
|  | Number of Homes
(millions) | 95% Confidence Interval |
| Propane |  |  |
|     Northeast | 0.4 | +/- 49.8 % |
|     South | 1.8 |      39.4 % |
|     Midwest | 2.0 |      46.6 % |
|     West | 0.7 |      49.6 % |
| Heating Oil |  |  |
|     Northeast | 6.2 | +/- 24.3 % |
|     South | 0.8 |      32.3 % |
|     Midwest | 0.8 |      27.6 % |
|     West | 0.2 |      51.9 % |

**Total households = 107.0 million**

## Residential ConsumptionWinter demand per house

| Estimated consumption per house (barrels per house per day) |  |  |
| --- | --- | --- |
|  | RECS 2001 | Regression Estimate |
| Propane |  |  |
|     Northeast | 0.067 | 0.024 |
|     South | 0.046 | 0.123 |
|     Midwest | 0.071 | 0.012 |
|     West | 0.049 | 0.042 |
| Heating Oil |  |  |
|     Northeast | 0.057 | 0.019 * |
|     South | 0.050 | - 0.016 |
|     Midwest | 0.051 | 0.037 |
|     West | 0.038 | 0.012 |
| * Not significant at 90% confidence interval. |  |  |

## Residential ConsumptionDynamic simulation Jan 2001 – Dec. 2004

## Inventories

- Estimated as month-to-month stock change (first difference) at PADD level.
- Census district heating degree days deviations from normal weighted to Census region by households using fuel as primary heat (current month and one-month lag).
- Wholesale product price markup over crude oil and natural gas spot prices
- Beginning inventory deviation from 4-year average.
- Monthly dummies

## Inventories Standardized beta coefficients

| PADD 1 (East Coast) Distillate Stock Change |  |  |
| --- | --- | --- |
|  | Estimated coefficient | Standardized Beta coefficient |
| Heating degree days deviations from normal | - 0.588 | - 0.252 |
| Wholesale price – WTI crude oil price | + 0.109 * | + 0.118 |
| Beginning inventory deviation from 4-year average | - 0.047 * | - 0.102 |
| * Not statistically significant at the 90% confidence level. |  |  |

**Notes:**
Standardized beta coefficient =

	est. coeff. x (std. dev independent variable)
		std. dev dependent variable

For a one standard deviation change in the independent variable, the predicted change in the dependent variable is Beta standard deviations

## Wholesale Price

- Distillate price estimated as differential to WTI crude oil price as a function of:
- WTI crude oil price current – previous month (first difference)
- Total U.S. distillate demand versus average of last 3 years.
- Beginning-of-month U.S. distillate inventory versus average of last 4 years.

## Wholesale Price

- wholesale price t
- 		= α0
- 		+ α1 crude oil price t
- 		+ α2 crude oil price t-1
- 		+ ...
- wholesale price t – crude oil price t
- 		= α0
- 		+ α1 (crude oil price t – crude oil price t-1)
- 		+...

## Wholesale Price Standardized beta coefficients

| U.S. wholesale distillate price – WTI crude oil price spread |  |  |
| --- | --- | --- |
|  | Estimated coefficient | Standardized Beta coefficient |
| WTI price first difference | - 0.175 | - 0.144 |
| U.S. distillate inventory deviation from 4-year average | - 0.220 | - 0.367 |
| U.S. distillate demand deviation from 3-year avg. | + 4.423 | + 0.110 |

- Standardized beta coefficient = estimated coefficient x (_std. dev independent variable_)
- 		                                                     std. dev dependent variable

**Notes:**
Standardized beta coefficient =

	est. coeff. x (std. dev independent variable)
		           std. dev dependent variable

For a one standard deviation change in the independent variable, the predicted change in the dependent variable is Beta standard deviations

## Wholesale PriceIssues

- Propane wholesale price options:
- Petrochemical sector
- Mont Belvieu, TX. spot price
- Conway, KS. spot price

## Retail Residential Prices

- Estimated as the difference between the residential price and the wholesale price.
- Difference between the current and previous month wholesale price
- PADD beginning-of-month inventory versus average of last 4 years.
- Census district heating degree days deviations from normal weighted to Census region by households using fuel as primary heat.

## Retail Residential Prices Standardized beta coefficients

| Northeast residential heating oil price – wholesale price spread |  |  |
| --- | --- | --- |
|  | Estimated coefficient | Standardized Beta coef. |
| Wholesale price first difference | - 0.346 | - 0.288 |
| PADD 1 inventory deviation from 4-year average | + 0.045 * | + 0.067 |
| Census region heating degree days deviations from normal | - 0.051 * | - 0.018 |
| * Not statistically significant at the 90% confidence level. |  |  |

- Standardized beta coefficient = estimated coefficient x (_std. dev independent variable_)
- 		                                                     std. dev dependent variable

**Notes:**
Standardized beta coefficient =

	est. coeff. x (std. dev independent variable)
		std. dev dependent variable

For a one standard deviation change in the independent variable, the predicted change in the dependent variable is Beta standard deviations

## Retail Residential PricesIssues

- Shift in residential – wholesale price differential.

## Retail Residential PricesShift in propane residential – wholesale price spread

- Difference in average prices by regions:
- Northeast		11.7 ¢/gal
- South		15.6 ¢/gal
- Midwest		  9.2 ¢/gal
- West		17.8 ¢/gal

- U.S. Average Residential – Wholesale Price