• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Heating-Oil Speculation Prompts Dire Forecast: Average 22% Price Hike

Posted on: Sunday, 10 July 2005, 18:00 CDT

Jul. 10--It's the dog days of summer, but already New Englanders are starting to get the chills about winter heating oil costs.

Heating oil prices are currently averaging $2.10 a gallon in Massachusetts, about 60 cents a gallon higher than they were at this time last year. Dealers say they have no idea which way the market is headed.

"The fundamentals of supply and demand no longer exist," said Ken Williams, president of Scott-Williams Inc., a Quincy heating oil dealer. "It's entirely speculative. Heating oil can move a dime a day on no news at all."

Mark Wolfe, executive director of the National Energy Assistance Directors' Association in Washington, is projecting that the average family's heating oil bill this coming winter will be $1,541, which is 22 percent, or about $278, more than last winter and 62 percent, or $589, more than the winter of 2003-2004.

In making his projection for this coming winter, Wolfe used an average price of $2.22 a gallon for heating oil. That price sounds off the charts, but most heating oil dealers who are currently offering their customers some form of price protection for this winter have all set their trigger-point prices higher than that.

Petro, the largest heating oil dealer in New England, is offering new customers a fixed-price contract for the coming winter of $2.29 a gallon and a cap-price contract of $2.34. MacFarlane Oil, a smaller dealer in Dedham, is offering some new customers a cap price of $2.49. A price cap limits how high a customer's price can go but theoretically allows the customer to take advantage of lower prices if the market takes a downturn.

What's particularly troubling for some oil dealers is that the wholesale price of heating oil on the futures market keeps hitting record highs. John Felmy, chief economist at the American Petroleum Institute, said last week that the wholesale price of heating oil for February delivery was $1.915 a gallon, an all-time high. Retail prices generally run about 45 cents a gallon higher than the wholesale price.

Felmy said participants in the futures market are clearly betting that the market for heating oil will be extremely tight this winter, even though heating oil inventories are currently running about 40 percent above average.

"Things can change, but at least in terms of what the futures market is predicting the price will be much higher this winter," Felmy said.

Nearly 9 percent of US households, according to the Census Bureau, heat their homes with heating oil. Most of those homes are located here in the Northeast.

Local dealers say commodities traders and hedge funds are driving up the futures price of oil with feverish speculation, but energy analysts say there are some fundamental reasons why the price of heating oil is on the rise.

The analysts say energy prices in general are rising because worldwide demand is so strong. Americans, who represent just 4.5 percent of the world's population but consume roughly a quarter of the world's oil, are now competing for supplies with fast-growing China and India.

Oil supplies are sufficient for the moment, but hardly plentiful. That's why even a hint of a supply disruption -- last week it was Tropical Storm Dennis in the Caribbean and its potential to knock out coastal refineries and oil rigs -- can drive oil prices to new highs.

Wolfe, of the energy assistance directors' association, said worldwide political instability is another piece of the pricing puzzle. "The uncertainty everyone is used to is winter," Wolfe said of heating oil prices. "But in the last couple years since Sept. 11 there's been a terrorist premium as well."

Analysts say heating oil prices are also being pushed up because of very strong demand worldwide for diesel fuel, which is essentially heating oil with more of its sulfur removed. The prices of the two fuels tend to move in lockstep.

A handful of heating oil dealers offered a small number of their Massachusetts customers relatively low-cost price protection for the upcoming winter. Most of the dealers bought oil in May, when prices temporarily dipped slightly. Lyons Fuel in Arlington offered a price cap of $1.99 a gallon, but customers had to sign up by June 1 to take advantage of the offer. Through the Mass Energy Consumers Alliance, a heating oil cooperative in Jamaica Plain, a suburban dealer has been offering a fixed price of $2.08 a gallon.

But price protection is now costing a lot more and many dealers haven't decided whether they will offer any protection at all this winter. The dealers say they are reluctant to buy supplies now for fear that the price will drop and they will get stuck holding expensive oil. They say the hedging costs associated with offering price protection for this winter are astronomical.

"They're very worried, extremely worried," said Michael Ferrante, president of the Massachusetts Oil Heat Council, which represents heating oil dealers in Massachusetts. "It's a crazy environment. Some would describe it as insanity."

Petro, a division of Star Gas Partners, reported a net loss of $24.1 million for the three-month period ending March 31. The hefty loss was caused by a number of factors, but one of them was lower profit margins associated with sales to price-protected customers and the failure to hedge or properly hedge the price protection. The company estimated its hedging problems cost it more than $2.4 million during the three-month period.

Dealers and state energy officials say consumers should begin preparing for an expensive winter now, setting aside spare cash, installing insulation, and replacing old burners.

Doug MacIntyre, senior oil market analyst at the federal Energy Information Administration, said options for consumers are limited. "I don't really have a lot of ideas for what consumers can do, just hope for a warm winter," he said.

Larry Chretien, executive director of the Mass Energy Consumers Alliance, said normally during the summer months the phones go dead at his office, but not this summer.

"We're having a very busy July," he said. "People are getting scared."

-----

To see more of The Boston Globe, or to subscribe to the newspaper, go to http://www.boston.com/globe.

Copyright (c) 2005, The Boston Globe

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

Source: The Boston Globe

More News in this Category