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Prepay Heating Oil? Not so Fast

June 16, 2008

By Tyrone Richardson, The Morning Call, Allentown, Pa.

Jun. 16–This is usually the time to decide whether to prepay for home heating oil.

But with oil prices skyrocketing, many Lehigh Valley heating oil dealers are not offering the option yet. Some aren’t sure if they will at all this year.

Heating oil prices averaged about $4.50 a gallon last week among Lehigh Valley dealers, up more than 70 percent from last year’s prepay average of about $2.60.

“We as a company do not have a plan to offer [prepay] yet for this year,” said Dave Loikits, president of Loikits Oil and Heating Co. in Whitehall Township. “We do it every year, but this year we have mixed feelings about it.”

Prepaying lets customers pay for oil in advance. Most oil dealers then buy the oil on futures contracts and deliver it to homes over the course of the year. Some oil dealers will buy the oil now and store it in tanks until winter.

Customers prepaying are betting that heating oil prices will be lower in the spring and summer — when they are not heating their homes — than the following winter when the furnace fires up.

The hesitancy of local dealers to offer customers the option of buying heating oil in advance underscores the volatility of oil prices and the market disruptions it causes.

Some dealers are worried about buying large blocks of oil at high prices out of fear they won’t find customers to lock in early. Others are simply waiting to see if they can offer a better prepay price later in the summer on the chance oil prices will drop.

But predicting the price of oil is a complicated guessing game that can befuddle experienced financial analysts, let alone the average person simply heating his home.

Rising demand from developing nations like China and India plays a role in the equation. Weather is another consideration. Hurricanes could disrupt production at refineries, causing prices to rise. A warm winter could decrease demand, causing heating oil prices to drop. In addition, the political climate of oil-rich nations in the Middle East can affect supply and prices.

And recently, investor speculation has driven up oil prices. Some investors turned to oil to protect themselves against the weak dollar, and the flurry caused oil prices to shoot up.

Generally, heating oil dealers offer a prepay plan in the months of May, June and July when oil prices tend to be at their lowest. But many local heating oil dealers say current prices are too high to get customers to commit.

Energy analysts are divided on whether crude oil prices will take a tumble or continue to rise. Crude oil is the No. 1 ingredient in home heating oil, and is the predominant factor that determines its price.

At $135 a barrel on Friday, the price of oil has decreased from a record $139 a week earlier. But oil is still trading at more than double what it was last year.

David Bednarski, president of EnergyWeb Solutions, an Allentown company that helps manage the Web sites of about a dozen local oil dealers, said none of his clients has offered the prepay option yet.

“This is the first time in four years that they are not eager to offer the prepay or they’re just holding off on it,” he said.

As an alternate to prepay, some oil dealers are pushing their budget plans, which would allow the customer to spread their heating oil costs over a 12-month cycle rather than making lump payments for each tank fill-up.

For Loikits, the price of oil has driven him to put the prepay option on hold as he holds out hope that prices will drop in coming months.

The wait also continues for Bruce Ebert, president of Pipeline Petroleum, Macungie.

“We feel there is an opportunity later on this summer,” Ebert said.

At Harned-Durham Oil Co. and Oil Discounters in Upper Milford Township, the prepay program has been offered sporadically because managers were unsure customers would lock into the plan with the higher prices.

The company purchased 84,000 gallons and offered a prepay rate of $3.69 per gallon and sold out in May. They later purchased an additional 84,000 gallons at $3.99 a gallon and sold out as well.

“It is a very difficult situation and we can’t go out there and buy an overwhelming amount and the price slides and we’re stuck with it,” said Mike Harned, the company’s president. “Years ago it would be no problem, but the price just isn’t the same.”

Harned has suspended the prepay plan as prices have continued to rise. He currently has a list of a few hundred customers who are willing to commit to prepay when the plan reopens.

“What we are telling customers is that we are not currently offering it, but when [prices] come back we are offering it again,” he said.

At Yeager’s Fuel in Allentown, president Tony Malandra said he was reluctant to offer the prepay plan, but he eventually did because long-time customers wanted to do it.

His prepay rate is $4.29.

“Some customers are coming in with no questions asked and buying the plan, while others are saying it will go down and they don’t want the rate,” Malandra said.

Regardless of the price, some oil dealers said customers prefer the plan as routine.

“There are customers who would probably pay at any price because they like the idea of the prepay,” Loikits said. “They want to just pay it and get it behind them for the year. It’s one less bill”

The Associated Press contributed to this story.

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