Interruptible Gas Service and Its Effect on Heating Oil Prices

Most of the time, natural gas and heating oil are not related.  Their market prices move up and down independently of one another, sometimes in opposite directions.  The two fuels are linked, however, by a provision in many natural gas customers’ agreements with their local distribution companies (LDCs): interruptible service.

Interruptible service means that the gas service to certain customers is not guaranteed and may be interrupted from time to time.  During the winter of 1999-2000, the combination of extreme cold, short heating oil supplies, and a high rate of natural gas interruptions in the Northeast led to a jump in natural gas (500% increase) and heating oil (133% increase) prices.  As temperatures dropped, gas supplies were interrupted, and houses and buildings with dual (heating oil and natural gas heating) systems switched over to heating oil for fuel.  According to an executive summary of the EIA report on the price spikes published by Natural Gas Monthly and available at AllBusiness.com:

Interruptions can be triggered by system operating conditions and/or temperatures…In some contracts with temperature-controlled provisions, service is suspended automatically when the outside temperature falls below a certain threshold and is not resumed until temperatures are above the threshold for a sustained period determined by the LDC.

Low temperatures triggered gas interruptions, causing hundreds and maybe thousands of buildings, many of them large skyscrapers in New York City and Boston, to switch over to heating oil all at once.  The sudden demand strain on the heating oil market caused scarcity and drove prices through the roof.  Although the sudden price increase was short-lived it did startle many residents of the Northeast, especially those who were not aware of interruptible service’s link to heating oil.

Be aware, HEAT Zone readers, that this week’s low temperatures could bring about a similar situation.  With high temperature below average for this time of year forecast for Thursday through Sunday, many interruptible customers will stop receiving natural gas and switch over to heating oil, significantly increasing demand in a short time.  The situation is much better than it was in 2000, however, mostly because supplies of fuel oil (many of them located in floating storage in New York Harbor) are near all-time highs, as today’s data from the EIA shows.

So keep an eye out for an up-creep in heating oil prices starting tomorrow, but don’t expect them to jump too high or last too long.