Fluctuations And Surges In The Heating Oil Market

Understanding factors that drive the volatility in residential heating oil prices.

Fluctuations: Variations that occur in the price of petroleum distillate products due to incremental, somewhat predictable, changes in the supply and demand of such products.

•More consumers begin using heating oil as a secondary heating source:

Some consumers may use heating oil to augment their existing heat source in times of extreme cold. Prices of other heating fuels (such as natural gas or kerosene) may increase even more than heating oil during these periods.

•Wholesale buyers and anxious consumers drive the market up:

Resupply may be weeks away. Concerned that supplies will not cover short-term customer demand, wholesale buyers bid up prices for available product. All the while the regional inventory is being depleted. Consumers become anxious about their short-term needs and continue buying up the current inventory; driving prices up sharply until the new supply arrives.

•Seasonal demand for heating oil:

Where the consumer lives also plays a significant part in the seasonal demand for heating oil. A homeowner in the Northeast might use 650-1000 gallons of heating oil during a typical winter, while their counterpart in South Carolina may use half as much

There is an appreciable amount of oil-heated homes located in New England and the Central Atlantic States. Approximately 6.3 million homes of the 8.1 million households nationwide that heat with oil are located in the northeastern part of the United States. That comprises roughly 78 percent of the total U.S. heating oil market. The seasonal increase in inventories and demand is largely confined to the Northeast. It is not uncommon for the total receipts for heating oil sales in the Northeast to exceed 80 percent of gross sales in any given year.

•Regional operating costs:

Prices in remote locations are also impacted by higher transportation costs. Operating costs of dealers can vary substantially with location as well. State and local fees and regulations vary widely from one locale to another.

Surges: Drastic upshift in prices over a very short period of time caused largely by unplanned events. Some of the conditions that initiate a surge in prices are listed below.

•Refineries cannot meet unexpected demands:

Refineries do not just produce heating oil. It is but one of the byproducts of their manufacturing process. It is not economically feasible for them to produce excessive amounts of surplus gasoline, diesel, and other distillate products to produce heating oil for a short-term demand.

•Unexpected rapid drop in temperatures:

A rapid drop in the temperature in a region can have a severe effect on supply and demand. Customers are using more fuel oil unexpectedly and inventories are being depleted faster than they can be replenished. Rivers and harbors may be frozen or other disruptions to the supply chain may occur.

•Competition in local markets:

Areas with a limited number of suppliers may also net higher prices. This is typically true in rural or remote areas where the competitive advantage of choosing between numerous providers is denied.

•Changes in the cost of crude oil:

As the principal cost component of all fossil fuels (at 42 percent of total cost), changes in the price of heating oil fuel are closely linked to the price refineries pay for crude oil. Price increases are complex and intermingled with one another. Global supply and demand as well as the state of the global economy and even the weather determine crude oil prices. The Organization of Petroleum Exporting Countries (OPEC) and other factors also influence supply and prices as well.

STAY WARM!