Are you enjoying the historically low home heating oil prices this year? You’re not alone!
Residents in the coldest states are experiencing savings of hundreds, and in some cases thousands, of dollars over what they were paying to heat their homes just a year or two ago.
The questions are, how long will these low heating oil prices last and what will be the price of heating oil during the 2017 winter heating season?
Heating Oil Price Predictions for 2016/2017:
To aid in this discussion, I am offering my home heating oil price predictions and advice on whether or not to pre-buy your home heating oil for the 2016/2017 winter heating season.
Over the last 9 years, I’ve offered my heating oil price predictions and given advice on whether or not to pre-buy (through prepaid heating oil contracts) your home heating oil. Not only have most Trees Full of Money readers enjoyed my advice and benefited substantially, there have been some great conversations in the comments section of my articles. Inevitably, the articles become an excellent forum for people to share and discuss their ideas and strategies for saving money on their home heating oil costs.
Home Heating Oil Payment Options:
Before I provide this year’s recommendation on whether or not you should lock in today’s home heating oil prices for 2017 by pre-buying, here is a quick review of some of the more common payment options offered by most 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 if you’re confident the price of oil will remain unchanged or even drop over the course of the heating season. It is also a good plan if you don’t want to lock in with a specific oil delivery company. For example, there are several heating oil delivery companies in my area that often have huge discrepancies in the amount they charge per gallon of heating oil.
The Monthly “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 downside of these “budget” plans is that you’ll often end up paying heating bills well into the spring and early summer months as well.
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. Traditionally, pre-buy plans have been an excellent option if you have the funds available, and expect the price of oil to rise over the winter season.
Heating Oil Delivery Companies Change Their Pricing Strategies:
As mentioned above, there was a time not too long ago when home owners could save a tremendous amount of money on their home heating oil bills by pre-buying their oil for the upcoming winter season.
Heating companies benefited because they reduced their risk exposure from customers not paying for deliveries, and the customers benefited by receiving a 5 to 15 cent per gallon discount over the fluctuating “cash price” or “spot price” at the time the delivery contract was signed (the market price for the heating oil on the day of the delivery).
This payment option worked very well for both the customer and the oil delivery company from about the year 1999 to 2007 as the price of oil rose with relative consistency. However, as this payment option was gaining in popularity, the price of oil rose dramatically and by early 2008 home heating oil spiked over $4.50/gallon in many parts of the country. Homeowners who were locked-in to the lower pre-pay price (myself included) enjoyed savings of over$2.00/gallon while others had no choice but to pay the full market price.
Delivery companies were left “on the hook” to buy enough oil at then higher wholesale prices just so they could turn around and sell it at the lower agreed upon contractual price they had with their pre-paid customers.
It was during this time that consumers really started to perpetuate the idea that it was “always” better to pre-pay for heating oil deliveries to protect yourself from rising oil prices. There were even banks during this period that offered loans marketed specifically for consumers who wanted to pre-pay for their heating oil but didn’t have the cash on hand to do so. Loan applicants believed they would save more money by pre-buying their heating oil than they would have to pay in interest on their “heating oil loan”.
Recognizing the growing favor that consumers had for prepaid heating oil delivery contracts (and to protect themselves from future swings in market prices), oil delivery companies started raising the relative prices of their pre-buy oil delivery contracts. Instead of offering the fuel at 5 cent to 15 cent discounts over the daily cash prices, the delivery companies started charging more money per gallon to pre-buy heating oil to be delivered later over the heating season. In addition to charging the customer more money per gallon of oil to pre-buy for the upcoming winter heating season, heating oil delivery companies also added a few new fees to “protect” the consumer from drastic increases and decreases in heating oil prices. These new fees would become known as “downside protection”. Here’s how the new fee works:
Example, if you prepaid for your home heating oil at $3.00/gallon and you paid an extra 25 cents per gallon for “downside protection”, you would never pay more than $3.00/gallon when the oil was delivered, even if the daily cash price of heating oil rose to $5.00/gallon as it almost did in 2008. With “downside protection”, if the daily cash price fell below $3.00 you would pay whatever that price was. The drawback of course is that the average price of heating oil over the entire course of the heating season would have to drop below $2.75/gallon for you to break even if you paid the extra 25 cents per gallon for the “downside protection”. Confusing I know…but the better you understand this strategy, the less likely you are to be ripped off by your home heating oil delivery company.
While these “downside” and “upside” protection options seem like a good idea for the consumer, they are actually another way of shifting the risk away from the delivery company and help them further capitalize on the belief consumers have that it is “always” better to pre-buy your home heating oil. There’s nothing wrong with what they’re doing, they’re simply charging what people are willing to pay.
Prediction for 2017 Home Heating Oil Prices:
As of today (1/01/16), my local heating oil company in Northern New England has a spot delivery “cash price” of $1.89/gallon. This is the lowest price per gallon I’ve seen since we built our home 10 years ago and this is primarily due to the dramatic fall in the price of crude oil over the last 12 to 16 months.
As you probably all know, the price of home heating oil is linked very closely to the price of crude oil. In general, when crude oil prices rise, home heating oil prices rise and vice versa. In order to predict the price of home heating oil in 2017, we must first look at the factors affecting the price of crude oil and make our prediction on what the price of crude will be leading up to 2017.
Factors Affecting the Price of Crude Oil:
There are several key factors that are currently affecting the price of oil. I’ll do my best to break down the largest factors and explain my reasoning for the price of oil to remain relatively low for the remainder of 2016.
Saudi Arabia and OPEC Production:
Without question, the largest force affecting the low price of oil is Saudi Arabia’s strategy of producing as much “cheap” oil as possible to increase their market share. It costs very little to produce a barrel of oil in Saudi Arabia because the oil reservoirs are relatively easy to drill and pump oil from. The majority of oil in the United States (either offshore in the Gulf of Mexico or shale oil in the interior) is much more expensive to drill and produce. With $80 to $100/bbl oil, it has been highly profitable for domestic oil companies to invest hundreds of billions of dollars to produce oil from these difficult oil fields. These results have been fantastic as oil production nearly doubled from 2008 to 2014 greatly impacting the amount of oil we needed to import from other countries. Saudi Arabia said “screw that” and started pumping as much oil as they could to drive the price of oil so low that it wouldn’t make sense for American oil companies to drill for the more expensive oil anymore. Saudi Arabia’s plan is that these American companies will stop drilling for new oil and as current oil wells begin to dry up and produce less oil (and worldwide demand for oil increases) the price of oil will come roaring back. Many people argue that Saudi Arabia’s plan will not work because all the American companies will have to do is just start drilling new wells and optimizing wells that are currently online. The problem is, in addition to many domestic oil companies dissolving, there will be few investors and/or banks willing to front the money to drill new wells or upgrade current wells out of fear that Saudi Arabia and other OPEC nations will just open the floodgates again and drive down the price of oil. With all this in mind, I feel we have at least another year of relatively low oil prices until we “burn through” the current oversupply in the market and domestic production of oil starts to decline.
Another factor affecting the price of crude oil is the relatively mild winter we’ve had (thus far in 2015/2016), especially in the traditionally colder northern states. Many investors believe that there are physical changes occurring in the Earth’s environment (Global Warming, El Nino effects, etc.) that will reduce the demand for oil in general over the next few years. It has been argued that the mild winter has a “psychological effect” on the price of oil. While I do believe the scientific research supporting global warming, I do not believe it is significant enough to have a net effect on the demand for oil.
Another driving factor behind the low price of oil is the anticipation that more oil will start coming into the market from countries like Iran and Iraq. The Obama Administration’s “negotiations” with Iran over their nuclear weapons aspirations have led to the discontinuance of a ban on the importation of Iranian oil. It is also expected that more oil will begin to be exported from Iraq as the country slowly makes progress (arguably) in the fight against ISIS and al Qaeda to get control of its vast oil reserves. The prospect of more Middle East oil coming into the world markets has indeed had an effect on current oil prices and should continue to do so for the foreseeable future.
Conclusion on Home Heating Oil Prices for 2017:
As you can see from the above, there is a TON of negative “worst case scenarios” already factored into the current price of oil. I don’t see the average price of home heating oil going much lower than the current national average of $1.90 gallon (as of 12/28/15 according to the US Energy Information Administration). In fact, given the historic low price of crude oil and the near “perfect storm” of negative events already factored in to the price of oil, I believe the price of oil is more likely to go up than down over the next 12 months. My OPINION is primarily based on the fact that I believe people are overestimating the ability of domestic oil production to pick back up once the supply from existing wells start failing to meet the ever growing demand.
Without hesitating, if I could lock in today’s heating oil prices of $1.70 to $1.90 per gallon that are currently being offered in my area (Maine) for 2017 I would do so.
This article will be updated throughout the year as pre-buy heating oil contract prices are announced.
A Few Cautions When Choosing a Heating Oil Delivery Company:
Remember, it’s not always about price when it comes to selecting a home heating oil Delivery Company. Many companies charge a little bit more per gallon of oil but add a tremendous amount of value in other areas such as 24-hour emergency service, free furnace inspections, etc.
Another issue to consider is the financial health of the company you’re dealing with. A few years ago, hundreds of customers in Maine (including my father in law) lost money when the heating oil company they “pre-bought” oil from went bankrupt. Most of their customers never recovered any of their funds.
As always, thanks for reading and please leave your feedback, comments and suggestions below!