UPDATE: You can read my recommendations for this year’s heating oil prebuy advice (the fall 2014 and winter 2015) here.
“Should I pre-buy my home heating oil this year”…
This is one of the most common questions I receive each year on my personal finance blog. As many of my long time readers know, I’ve been very successful in predicting home heating oil prices over the last 5 or 6 years and readers keep coming back each fall to get my recommendations for the upcoming winter heating season. To help aid in this decision, I am once again offering my home heating oil price predictions for the fall of 2013 and winter of 2014.
Historically, pre-buying home heating oil via pre-paid or pre-purchase contracts, can be a great way to save money on heating oil costs during the cold winter heating season. However, if you’re not fully aware of the risks, you can also end up paying way too much money for heating oil as many consumers found out in 2008. In extreme cases, you can even lose your entire upfront payment as residents of Mid-Coast Maine found out when their local heating oil delivery company filed for bankruptcy.
Predicting home heating oil prices for the upcoming winter heating season has become one of the most popular series of articles each year on my personal finance blog Trees Full of Money.
While I provide this service for entertainment purposes, I am proud to say that I have developed an exceptional track record over the last 5 years in recommending the most beneficial payment option provided by most major heating oil delivery companies in the northern regions of the United States.
In last year’s heating oil price prediction analysis, I recommended NOT to prebuy your heating oil contract unless you could lock in a price of $3.35-$3.65 per gallon of heating oil. In my particular area, the cash or spot delivery price of heating oil was actually less than what the per gallon “pre-buy” price was!
Last spring (2012), heating oil was hovering around $3.70-$3.80 yet my local heating oil delivery company wanted to charge me $3.89 per gallon for a pre-buy contract! If I’m going to pre-buy my oil, AT THE MINIMUM, I expect a discount just for the simple fact that I’m paying the money upfront and there is no risk to the delivery company that I won’t pay as agreed (most home heating oil deliveries are made on credit where the homeowner in billed after the delivery is made. Not to mention the oil company is earning interest on my money.
Before I provide this year’s recommendation on whether or not you should lock in today’s home heating oil prices, here is a quick review of some of the more common payment options offered by many local heating oil delivery companies.
The Spot Delivery or “Pay As You Go” Plan:
This plan means that you pay whatever the current cash price is for heating oil for the day it was delivered. This plan is excellent is you know for sure the price of oil will remain unchanged or even drop over the course of the heating season. Unfortunately, the price of oil has been so volatile over the last few years that making this prediction with any level of confidence is nearly impossible.
The “Budget” or Price Protection Plan:
This plan has been my favorite over the last few years. You sign a contract for the delivery company to deliver oil to your home for the entire heating season. The best part about most budget plans is they offer a “cap” or “price ceiling” on the price you pay per gallon, but unlike “pre-buying” contracts, if the price of a gallon of oil goes below the price per gallon you budget for you get the advantage of paying the lower price. As an added advantage, your payments are spread out evenly over a 10-12 month period so that you are not faced with gigantic heating bills during the coldest months of January and February.
The Pre-Buy or Pre-Pay Plan:
When you pre-buy or pre-pay your home heating oil, you pay for your home’s total estimated oil usage for the entire winter season upfront. The price you pay is usually competitive with the current spot delivery prices on the day you sign your contract. Pre-buy plans are excellent if you have the funds available, and expect the price of oil to rise over the winter season.
Should You Prebuy your home heating oil for the 2012-2013 winter heating season?
Although I’ve been fairly accurate in my predictions over the last few years, this year’s prediction still comes with several cautions.
First, after observing what my father-in-law experienced three years ago when the oil delivery company he pre-paid filed for bankruptcy and he lost the balance in his account, I have come to appreciate the value of being able to “hang on to your money“. Before considering prepaying for my home heating oil, I would absolutely want to make sure that the company I was dealing with had a solid track record and was well grounded in the local community.
Second, like last year, the price of a gallon of oil is trading approximately in the middle of the range it has fluctuated in over the last few years which means that in a “perfect market” the price of oil has just about as good a chance of going up as it does of going down.
When oil prices are historically low (as they were in 2009), you can make a reasonable bet that pre-buying your heating oil (at a slight discount under current cash prices) will offer you the best price protection. However, when prices are historically high (as they were in 2008 at over $4.50 per gallon) I tend to shy away from pre-buying contracts as there is very little upside in price but plenty of room (historically) for the prices to go back down.
Like last year, with prices in the “middle” of the two extremes I have less confidence in making an accurate prediction of whether or not you should pre-buy your heating oil for the 2013/2014 heating season. As of today (10/9/12), my local heating oil company is charging $3.79/gallon for their pre-buy prices (current “spot rate” or “day rate” is only $3.59/gallon). In addition to the $0.20/gallon premium to pre-buy your oil, my local oil delivery company is charging $0.25/gallon for “downside protection” to protect you if the price of oil actually does drop while you are still receiving your pre-bought deliveries.
In other words, I would end up paying $4.04/gallon to pre-buy my home heating oil vs. paying only $3.59/gallon to fill up my tank today. The only way I would come out ahead pre-buying my heating oil (with downside protection factored in) would be if the “spot price” of heating oil rose above $4.04/gallon. I just don’t see a reasonable situation where heating oil rises above $4.04/gallon during the upcoming heating season.
Several years ago it made sense to pre-buy your home heating oil, however, oil delivery companies are capitalizing on consumer’s new perception that “it always makes sense to pre-buy heating oil” by actually charging more to pre-buy the oil vs. paying the daily delivery price when you need the oil. This just doesn’t make sense.
For the 2013-2014 heating season, I will only pre-buy if I can lock in at a price less than $3.39/gallon, and I will never pay for downside protection. Buying downside protection insurance when you pre-buy home heating oil defeats the whole purpose of pre-buying your oil. The delivery company is basically selling you “insurance” on your investment to pre-buy oil. Its almost like buying GAP insurance on your vehicle when you bought the car with cash (GAP insurance pays the difference between what you owe on the car and what the car is worth should it be totaled in an accident).
An alternative method to protect yourself from rising heating oil prices.
As always, if you’re interested a more “advanced” method of hedging against the rising cost of home heating oil prices, check out my article on how to hedge against rising gasoline prices, except instead of buying gasoline ETF (electronically traded funds), you protect yourself by buying home heating oil ETFs (I like ticker symbol UHN).
Also, if you’re interested in learning about how offshore oil and gas wells are drilled, check out my article on an introduction to drilling offshore oil and gas wells.