Negotiating A Tricky Market–

The Heating Oil Price Quandary

By Nancy K. Crevier

Oil companies and customers alike are having a difficult time this year, is Don Mitchell’s assessment of the heating fuel situation. Mr Mitchell has been with Mitchell Oil in Danbury, started by his father in 1945, for more than 30 years. The cost of heating oil now is the highest it has ever been, he said, and with a very volatile market, “Every day is a new adventure,” said Mr Mitchell. “The price this year will be $2 to $3 more a gallon than last year.” That means that customers who took advantage of one of the budget cap plans offered by the company last year at $2.49 a gallon will pay between $4.59 and $5.19 for the same plan this year.

“We are strongly suggesting to people that they conserve on fuel and upgrade to more efficient equipment. This is an energy problem, not just an oil problem,” he said.

Mitchell Oil has always offered budget cap plans and prebuy plans, and will continue to do so, said Mr Mitchell. Whether or not people will elect early on to take advantage of a plan or wait it out in hopes that oil prices will dip is yet to be seen. “It’s a little early in the season to get the pulse,” cautioned Mr Mitchell. “We would rather protect our customer by capping the price or offering a prebuy, though.” The company must be cautious on prebuying heating fuel for next year, as well, said Mr Mitchell, leaving them to perform a delicate balancing act. Buying too much, too far ahead, at a price that is too high does not benefit either the company or the customer.

“We are doing our best to work deals out with people, because many of our customers have been with us a very long time. We value our customers, and find that we are right in the middle of it all,” he said, adding that his biggest concern was for those people on fixed incomes. Mitchell Oil does offer a discount for senior citizens, but he fears that even with government assistance, others on fixed incomes will find that they are going to have a tough time this heating season. “I just hope you don’t see anyone going without heat this winter,” he said.

Ann Piccini, director of social services in Newtown would not be surprised to see a big increase in the number of applications for fuel assistance this fall. Normally, the agency processes more than 200 applications, but the huge leap in heating oil prices will probably create a new category of many more people who would not usually seek aid.

“The Community Action Committee of Danbury [CACD] administers a state and federal fuel assistance program, starting in October of each year with applications,” said Ms Piccini, for November deliveries of fuel for the main heating source. Federal poverty guidelines are used to determine eligibility for assistance, she explained, and those guidelines usually are issued in September. Once the guidelines are issued, she expects social services and other assistance programs to see a surge in requests for help.

For information about getting help this winter with heating fuel costs, call Social Services of Newtown at 426-4330 or contact CACD at 748-5422.

“I don’t doubt that [the heating season] will be tough on those with limited incomes,” added Ms Piccini.

It is hard to give anyone advice in this market, said Kenny Anderson of Kenny’s Oil. “People are calling and asking should they buy now, buy later, fill the tank, fill the tank half way, and I don’t know what to say,” said Mr Anderson, who has owned his own oil company for four years.

The heating oil situation is just as scary for him this year as it is for his customers, he said. Unlike larger companies that offer prebuy or budget plans, his business is strictly cash on delivery (COD). Customers are sometimes lulled into a false sense of security by having a contract with an oil company, but Mr Anderson pointed out that even large companies have gone out of business in recent years. “If a company goes bankrupt, the customer is stuck,” he said.

To service his 800 to 900 customers, mostly in Newtown, but also in Southbury and Bethel, Mr Anderson generally fills up his 26,000-gallon truck twice a day during the peak of heating season. Added to the cost of the oil is the cost of putting his truck on the road. Right now, it costs him $1 per mile to just drive the truck. Replacing two front tires set him back nearly $1,000 recently, so dealers themselves have a very small margin to play with if they are going to earn a living, he said.

Because the price of oil has been so unstable on the market, Mr Anderson has found it necessary to constantly check the web, the stock market, and any other source of news to judge when to buy and how much oil to buy. “If the price drops and I have bought oil at a higher price, I have to drop my price to stay competitive. If it drops, I drop. If I don’t buy and the price goes up, I don’t raise the price until I fill up the truck again. That’s just the way I do business,” he said. Stable prices the past few years have given him little cause for concern, but this year could be different.

Last March, when he received SOS calls from elderly citizens who needed oil but had no money until tax rebate checks from the government arrived, he was able to gamble, fill the tanks, and hope that he would get paid. That will be harder for the “oil man with a heart” to do this coming winter if he wants to survive in the business. “I won’t be able to extend credit this year. It will be strictly COD, I’m afraid,” Mr Anderson said. “It’s scary.”

An Irrational Market

Steve Rosentel of Leahy’s Fuel, Inc spends a lot time reading industry newsletters, but still, he said, it is hard to get the feel for this year’s heating fuel situation. “The market is irrational,” said Mr Rosentel. “My gut feeling on any market that has been this overheated is that typically it is more likely to go down than up,” he said. “In February of 2008, we were below $100 a barrel for oil, so it’s not really a ridiculous assumption that the price could drop.”

Leahy’s customers are struggling with what were once standard decisions: should they opt for a budget plan? Should they prebuy? Should they wait to lock into a cap price or lock in now? “Five years ago, 70 percent of our customers would have opted for a prebuy program by this date and locked into a price,” Mr Rosentel said. “This year, we have 2.3 percent who have chosen to do so.”

But a year ago, the lock-in price stood at $2.59 per gallon for heating oil; as of July 7, the program Leahy’s could offer customers stood at a pre-buy price of $4.89 per gallon.

“Historically, we saw a swing of less than two cents a day in the future’s trading price on heating oil contracts; today, the swing was 14 cents. The market is crazy,” said Mr Rosentel.

The fluctuating market makes it difficult for the dealer, as well as for the customer, he explained. “We have to have on hand what we have contracted for,” he said. On the other hand, when a dealer is looking at buying 42,000-gallon blocks for the month of December, it is a huge amount of risk. “If December is warm, we could have too many gallons coming in at that high price. It’s very unnerving to think about buying a 42,000 gallon piece that I don’t have committed,” Mr Rosentel said. Nor does he want to have to pass on to his customers a higher priced heating oil if prices drop during the heating season.

That said, Mr Rosentel indicated that people can still expect to pay a great deal more this winter for heating fuel than they did last year. He offered a few suggestions as to how consumers can conserve this coming winter.

 “The easiest thing is to set back the thermostat, even a couple of degrees. Insulate the home. Caulk the windows, and consider zone heating, or alternative heating methods for the most commonly occupied parts of the home,” he said. There has been renewed interest among consumers for products like the instantaneous water heater, which has no storage vessel, said Mr Rosentel. “The burner kicks on only when hot water is called for, and turns off when it is not being used. These have dramatically improved in recent years,” he said, and are just one option for reducing fuel consumption.

“I’m advising people to be careful, know who you are dealing with when buying fuel oil,” said Mr Rosentel. “But it’s like buying stock; people have to make their own decisions. We don’t have a crystal ball and there is a likelihood of the price moving. The question is, which way?”