Does it make sense to pre-buy your home heating oil? Can you save money by prepaying for home heating oil deliveries? When is the best time to fill your home’s heating oil tank?
The weather may be getting warmer, but the 2017/2018 winter heating season will be here before you know it. With that in mind, it’s time for my annual heating oil price prediction and buying advice for the upcoming winter season.
Heating Oil Price Predictions Fall 2017/Winter 2018:
My annual heating oil price predictions have become a very popular series on my personal finance blog over the last 9 years (and recently featured in one of New England’s prominent newspapers) and I’d like to thank all of you who have commented on these articles and shared your own experiences over the years.
Home Heating Oil Payment Options:
When it comes to buying home heating oil, most homeowners contact a local delivery company and have them make deliveries every few weeks during the cold winter months. Heating oil delivery companies can forecast when you’ll need a delivery based on weather and your home’s historic usage and will schedule deliveries to ensure you don’t run out. There are many payment options when it comes to home heating oil and knowing the difference could potentially save you hundreds (or thousands) of dollars a year.
Cash Price or Spot Deliveries: When heating oil is delivered this way, homeowners are typically charged the “spot rate” or “cash price” per gallon on the day it was delivered. This “pay as you go” method of buying home heating oil is very popular, especially when heating oil prices are stable or expected to go down in price. Spot deliveries of heating oil also provide homeowners the option of using multiple dealers throughout the winter season. In some areas, there can be quite a discrepancy between various heating oil delivery companies.
The Budget Plan: Another alternative customers have when purchasing heating oil is what I call the “budget plan”. With this method, your heating oil delivery company will estimate your annual heating oil consumption and spread your payments out over the year. The budget plan is easier for many families as it spreads those high energy bills during the colder winter months over the course of the entire year. In some cases, delivery companies will give you the option to “lock-in” the current price of heating oil to help make your home heating costs more predictable. One thing to be careful of when it comes to budget plans is you may end up using more oil than estimated if there is a particularly cold winter forcing you to pay the difference once you pass your allotted delivery amount.
Pre-Buy or Pre-Paid Plan: Another popular option when it comes to home heating oil delivery is pre-buy or pre-purchase oil delivery contracts where you pay upfront for your home’s estimated heating oil use for the upcoming heating season. For a long time (until approximately 2008) this was a very popular method for saving money on home heating oil costs. Oil was rising fairly steady up until this point and heating oil delivery companies would offer 10 to 25 cent discounts per gallon if you pre-paid for your home’s anticipated heating oil usage. It worked well for the consumer because they would get a discount and could avoid paying higher prices for heating oil during the winter months. It also worked well for the delivery companies because they didn’t have to worry about you not paying your heating bill because they already had your money.
Heating Oil Delivery Companies Change Their Pricing Strategy:
While deep discounts and incentives on pre-paid heating oil delivery contracts worked for a while, the plan backfired for dealers in 2007 when they were on the hook for millions of gallons of heating oil at a retail price of over $4.50/gallon that pre-paid customers had only paid $2.50/gal for. Most heating oil companies had their own contracts in place with heating oil wholesalers, but many companies ended up burning through their cash reserves to keep their operations going.
It was around this time that heating oil companies introduced what would become known as “downside protection” in their delivery contract. Instead of taking on all the risk of rising (or falling) oil prices themselves, they would pass this risk on to their customers as a separate fee (surcharge) per gallon. These new fees coincided with consumer’s shifting expectation that it was “always” better to pre-pay for home heating oil because they imagined that oil prices would only go higher. Consumers were willing to pay more to “lock-in” their heating oil prices even if it meant paying a little more than the current spot delivery (cash) price. In other words, where they once received a 10 to 25 cent per gallon discount by pre-paying for their heating oil, they were actually willing to pay more than the current delivery price out of fear that oil prices would keep rising.
These new downside protection “fees” are essentially an insurance, paid by the consumer, to protect the heating oil delivery companies from rising prices. Here’s how downside protection works as explained in last year’s article.
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/gallon 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”.
As I’ve said before, there’s nothing wrong with the fees associated with these “downside” and “upside” protection plans and many families are willing to pay a premium for the peace of mind knowing exactly what their energy costs are going to be each month. It is important that you make an informed decision on what heating oil delivery option is best for your particular situation and risk tolerance.
Should You Pre-buy Your Home Heating Oil for Fall 2017 and Winter 2018:
To help you make an informed decision on whether or not to pre-buy your home heating oil for the 2017/2018 heating season, I’ll walk you through the current pricing and payment options offered by one of the most prominent oil delivery companies in my area (as of 5/12/2017):
My local oil delivery company is currently offering customers the option to pre-buy their home heating oil for the upcoming 2017/2018 winter season for $2.40/gal. At the same time, they are offering a “spot delivery” cash price of $2.25/gal. They are charging 15 cents more per gallon if you pay for your heating oil in advance. For an additional 25 cents per gallon you can purchase “downside protection” which gives you the benefit of lower priced oil in the event the spot price of oil is lower than the $2.40/gal on the day it was actually delivered. It’s easy to get lost in all of these various fees and surcharges, but here’s what it breaks down to:
If you pre-pay for heating oil from this particular company and purchase the “downside protection”, you would end up paying $2.65/gal. Compare this with today’s spot delivery price from the same company at $2.25/gal and you’re talking about a 40 cent per gallon premium to pay upfront for your heating oil.
To analyze this option, you first must ask yourself what the breakeven point would be? How high would the price of oil need to rise in order for you break even. In this example, oil prices would have to rise from today’s spot delivery price of $2.25/gal and average above $2.40/gal throughout the upcoming heating season. The key word here is “average”. If the price of heating oil doesn’t reach $2.40/gal until March 2018, you’ll have over paid for the other months leading up to it.
If you opted for the “downside protection” option for an additional 25 cents per gallon, heating oil would need to rise above $2.65/gal before you broke even; however, you would have the peace of mind of paying a lower delivery price if the price of oil were to drop significantly.
On the flip side, your 25 cent per gallon “downside protection” means that the average daily spot price of oil would need to dip below $2.00/gal throughout the upcoming heating season before you broke even.
What your decision should boil down to is how likely you think the price of oil will go up (or down) compared to the current spot delivery price (the baseline price for your decision). If you think heating oil prices are likely to average 20% or more higher than they are now, you’d probably want to pre-buy your home heating oil.
If you think heating oil prices are going to remain relatively stable or even drop through the spring of 2018 then you should stick with the pay as you go “spot” deliveries.
If you like the peace of mind knowing that you’ll never pay more than X amount of dollar per gallon of oil but you want to take advantage of lower heating oil prices if they occur, you’d be a good candidate for pre-buying your home heating oil with the “downside protection”.
So Where Are Heating Oil Prices Headed?
As I’ve written in the past, heating oil prices are very closely correlated to the price of crude oil. Since the fall of 2014 the price of crude oil has fallen more than 60% bottoming out around $24/bbl and eventually settling out in the $45 to $55/bbl range. Heating oil prices have seen similar price movements.
There are a variety of factors that affect the price of oil including demand, trade policies, geo-political issues, terrorism, and weather patterns to name a few.
Currently, I don’t expect any significant changes in the price of oil in the next 12 months. I think oil prices are more likely to go up than they are to go down but I would be extremely surprised to see oil average any more than $60/bbl over the upcoming winter heating season. In my area this would equate to a heating oil price of about $2.75/gal (about 50 cents higher than current prices). I think a more realistic scenario is that oil prices average about 20-25 cents higher than what they currently are today (5/12/17).
Heating Oil Pre-Buy Decision Chart:
One of the new tools I’m unveiling this year is my Heating Oil Pre-Buy Decision Chart. Over the years many of my readers email my directly (or leave comments at the end of this post) to review various offers from their local delivery company. This tool helps to visual the philosophy I use when making my recommendations and is specific to pre-paying for home heating oil for the Fall of 2017 and Winter 2018 and will be updated as changes occur in the heating oil markets.
How to Use the Heating Oil Pre-Buy Decision Chart:
Step 1: Find out what the “pre-buy” price is for home heating oil in your local area.
Step 2: Find out what the average “spot price” is for heating oil in your local area. If you have more than one local heating oil delivery company, call a few different places and calculate the average price.
Step 3: Use these two values (the spot price per gallon and the pre-buy price per gallon) in the decision grid to determine what color you land in. If you land in a “red” block, you should probably not pre-buy your home heating oil. If you land in a “yellow” block, you’re in what I call the neutral zone where there is an equal chance of coming out ahead or behind if you pre-purchase your heating oil. If you land in a “green” block, you should consider pre-buying your home heating oil.
Note: As you can see from the chart, I believe current market conditions favor at least a 10 cent increase in heating oil prices between now (May 2017) and the upcoming heating season. As many people have pointed out, these are only my predictions and I offer no guarantee as to the accuracy of these predictions. The intent of this article is to give you a better understanding of the various heating oil pricing plans available and the decision process I use when determining whether or not to pre-buy my home heating oil.
Cheapest Isn’t Always Better:
When it comes to buying home heating oil for your home, it can be very easy to get caught up in the price per gallon; however, another important thing to consider is the reliability and customer service of the oil delivery company. Are they a full service company that offers 24-hour emergency service? Do they come highly recommended from your friends and neighbors? Are they a financially secure company? The last thing you want to do is pre-pay for your home heating oil only to have the company declare bankruptcy a few weeks later (it has happened).
I hope you’ve found this information useful. As always, if you have any questions, comments or concerns on home heating oil prices, please feel free to leave them in the comment box below.
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