How price predictions affect heating oil supply contracts

Wednesday, October 26, 2011

Nearly half the households in the northeastern region of the United States use heating oil to provide part or all of their space heating needs.  While natural gas fuels furnaces in many homes in other regions of the country, New England is a significant consumer of heating oil.  According to the U.S. Energy Information Administration, about 80% of U.S. households that use heating oil are located in the Northeast.

Those of us managing households in the Northeast know that heating oil companies typically offer customers different ways to buy oil.  The most basic approach is to buy oil on the spot market.  Under this approach, when a customer wants a delivery of oil, the customer can call around and select a supplier for a single delivery.  This approach lets customers benefit when prices go down, but leaves customers exposed to the market risk that prices may go up.

One alternative some customers prefer is locking in heating oil prices through a supply contract with a single supplier.  According to the EIA, customers' taste for this alternative changes based on predictions about future fuel prices.  In the middle of the last decade, about one-third of Northeast homeowners chose contracts; that number approached half of homeowners in 2008 in response to anticipated high fuel prices.  As it turned out, petroleum prices fell sharply in the second half of 2008; the fraction of homeowners with supply contracts fell to about 25% in both 2009 and 2010.  Now, the EIA reports that heating oil associations in the Northeast are predicting that even fewer customers will lock prices in this year.

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