Factors Affecting Heating Oil Prices
Why Do Heating Oil Prices Fluctuate?
Heating oil prices paid by consumers can vary over time and by where a consumer lives. Prices can change for a variety of reasons. Four of these reasons are:
- Seasonality in the Demand for Heating Oil
When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is highest. However, at times, prices can surge quickly to very high levels. A homeowner in the Northeast might use 850-1,200 gallons of heating oil during a typical winter, while consuming very little during the rest of the year.
- Changes in the Cost of Crude Oil
Because crude oil is a major price component of heating oil, changes in the price of crude oil will generally affect the price of heating oil. Crude oil prices are determined by worldwide supply and demand. Demand can vary worldwide with the economy and with weather. Supply can be influenced by the Organization of the Petroleum Exporting Countries (OPEC) and other factors.
- Competition In Local Markets
Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors. Consumers in remote or rural locations may face higher prices because there are fewer competitors.
- Regional Operating Costs
Prices also are impacted by higher costs of transporting the product to remote locations. In addition, the cost of doing business by dealers can vary substantially depending on the area of the country where the dealer is located. Costs of doing business include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and local fees.
What Causes a Surge in Heating Oil Prices?
Home heating oil prices sometimes can change dramatically in a short period of time. why does this happen? If refiners, wholesalers, dealers and consumers have enough heating oil in storage and temperatures do not drop rapidly, prices hold fairly steady (assuming crude oil prices are also not changing much). However, a rapid change to colder weather can impact both supply and demand; people want more fuel at the same time that harbors and rivers are frozen or delivery systems are interrupted.
During this time, the available heating oil in storage is used much faster than it can be replenished. Refineries normally cannot keep up with demand during these cold periods. Wholesale buyers become concerned that supplies are not adequate to cover short-term customer demand and bid up prices for available product.
In the Northeast, for example, additional supplies may have to come from some distance away, such as the Gulf Coast or Europe. Transporting heating oil from these sources to the Northeast is more costly, and delivery can take two to three weeks. During the time that resupply from distant markets is occurring, the supply of heating oil that sellers in the region have in storage drops further, buyers’ anxiety about finding heating oil in the short term rises, and so do prices – sometimes sharply- until new supply arrives.
In addition, during very cold periods, prices of other heating fuels (such as natural gas or kerosene) may increase even more than heating oil prices. In this case, some consumers may switch from using their normal heating fuel to using heating oil, further increasing the demand for heating oil.