UPDATE: You can read my recommendations for this year’s heating oil prebuy advice (the fall 2014 and winter 2015) here.
In just a few short months, homeowners in the northern parts of the US will once again be faced with a decision to pre-buy their home heating oil. To help aid in this decision, I am once again offering my home heating oil price predictions for the fall of 2012 and winter of 2013.
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 (2011), 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 two 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 safely bet that prebuying 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 prebuying 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 prebuy your heating oil for the 2012/2013 heating season. As of today (4/24/12), my local heating oil company has not released their pre-buy and budget plan pricing.
I believe the price of a barrel of oil will decline back down to a more “natural” price range of $85-90 over the next 12 months from its current price of about $103 per barrel. I also believe this will help lower the price of home heating oil to between $3.45 to $3.75 per gallon here in Maine (based on my best educated guess using my homemade Excel algorithm using the factors that affect the price of oil including, American Petroleum Institute supply/demands statistics, perceived tensions in the Middle East and other oil producing countries, hurricane season intensity index forecasts, etc). I also believe the EXTREMELY mild winter we just had will push away a lot of the “oil speculators” many believe artificially inflated the prices of liquid petroleum products.
If given the opportunity, I would consider pre-buying heating oil if I was offered a price of $3.55 per gallon or less, but if my local delivery company charges anything above that to “lock-in” heating oil prices, I’m going to pass and simply “pay as I go”.
An alternative method to protect yourself from rising heating oil prices.
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.
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