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As summer heats up, heating oil prices cool down

August 4, 2010

For the moment, it’s all quiet on the heating oil front, which should mean consumers can expect prices to hold at present levels with the heating season looming around the corner.

While oil prices might be the furthest thing from consumer’s minds during the height of the summer, it can be an opportune time to take advantage of deals and decide on pricing options for the future.

John Gerlach, professor of Finance of Sacred Heart University, views the oil market as relatively quiet, which should continue, barring a major natural disaster or terrorist activity.

“There are no strong pressures to move up or down,” Gerlach said. “Oil has crept up a bit even though we’re coming out of the summer driving season when prices tend to rise.”

At the beginning of this week, oil prices broke the $80 level per barrel after dipping to about $70 in May. The price has hovered in that span for the last six months. Consumer heating oil prices are now holding between $2.28-$2.38 through most Fairfield and Westport dealers.

Gerlach thinks this pattern should prevail but sees a troubling development with the number of oil rigs in the Gulf that remain inactive because of the federal government moratorium on offshore drilling in the wake of the massive BP oil spill.

“We haven’t seen the end of the BP fallout,” Gerlach explained. “Some rigs can’t be idle that long. If this continues, it can raise the cost of getting oil out of the ground.”

Gene Guilford, executive director & CEO of the Independent Connecticut Association of Petroleum, also sees stable oil prices for the foreseeable future. He disagrees that the federal moratorium will affect the oil market, but views the state of the economy as the key influence on oil prices.

“The most important question is the state of the economy which continues not to be good,” Guilford said. “The demand [for oil] is not where it was two years ago. All energy markets are down.”

With a stable market in mind, consumers have several options of buying heating oil for the cold weather ahead.

1. Fixed Price Contract

This contract involves purchasing a set amount of gallons of oil for a fixed price during a specific period. Keep in mind to complete this contract, dealers typically ask for payment up front. Guilford points out that this contract guarantees stability, but not necessarily a cost savings since the market is unpredictable. When you buy oil ahead, you own it. Dealers must purchase 80 percent of the oil contracted under a fixed price. As a result, consumers are obligated to pay the contracted price even if prices drop. To get out of the contract, you may face costly cancellation fees.

2. Cap Price Contract/Downside Protection

A cap price contract rates among the most popular budget plans, according to Guilford. What this entails is the consumer will never pay more than the cap price. If prices fall during the heating season, consumers pay the market price. However, read the fine print since many cap programs might carry a premium price protection. Consumers should understand how their Cap Program works and under what circumstances prices will decline.

3. Budget Programs

You can set up a monthly budget plan to for your heating that spreads out equal payments across 8-10 months. However, this option offers no cap or fixed amount protection as you pay the market price.

Forecasting the price of oil over an extended period is, at least, illusive since there are many complex economic forces at play. Gerlach suggests three basic approaches the Federal Government can take to help keep oil prices under control:

•Strengthen the dollar, which is the basic currency for the oil market worldwide. Commodities traders have flocked to invest in gold, silver and oil as a hedge against the falling value of the American dollar.

•Create a stimulus package that won’t demand the government to dole out additional dollars. As an example, the government can offer tax incentives to companies that create jobs for workers.

•Stop printing money and control the government deficit;

Consumers can also control their heating costs with conservation measures in their homes and in their driving habits. Guilford thinks consumers have done a fine job, limiting their energy consumption and embracing more conservation measures to protect the environment and save money.

“There’s not a lot influencing the price of heating oil right now,” Guilford said. “We have cut back on demand from a couple of years ago. Cutting back on consumption and using alternative energy sources all helps keep prices stable.”

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National Oilheat Research Alliance ECC is funded in part through the National Oilheat Research Alliance.