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Speculators fuel home heating oil price spike

October 25, 2010
There's no need wasting energy blaming your local heating oil companies for the cost of keeping your home warm this winter.

It's not their fault.

Instead, direct your anger toward the hedge fund managers and energy speculators sitting in offices in New York City as they bet on the future price of crude oil coming off ships from overseas, mostly the Middle East.

"It's frustrating for consumers and our industry," said Michael Ferrante, president of the Massachusetts Oil Heat Council, based in Wellesley. "Speculators in the market are prognosticating on where things will go. Why? So they can earn money. Most of those who speculate about heating oil have an investment in heating oil. They buy heating oil contracts, and that drives the price up, then they sell those contracts."

Local home heating oil dealers agreed.

Leo LaRochelle, president of Victory Fuel in Newton, N.H. said the volatility of the market makes it tough for those in the industry.

"It (the price) is usually going up more than it's going down," he said.

Earlier this week, there was an 8-cent decrease one day and a 5-cent increase the next day.

"It's extremely hard to even quote prices," he said. "It's a big, vicious cycle. The market is too unstable."

LaRochelle added, "It all has to do with the stock market and speculators."

Mark West, manager of Rockingham Oil in Derry, said he has noticed a general upswing in oil prices lately.

"Over the last couple of weeks, they have been on the rise," he said, noting it is not unusual to see sharp increases in a single day.

"You can't tell anymore," he said "It's not supply and demand anymore. It's all market driven."

As simplistic as that may sound, speculation and hedging appear to be the driving forces behind the high price of oil at the moment.

According to the Mass. Department of Energy Resources, the average price of a gallon of home heating oil in Massachusetts is $2.95, up from an average of $2.72 in August. This week's price is the highest it's been since January, when it was $2.96 a gallon.

In New Hampshire, the latest average credit price for heating oil is $2.81 per gallon, according to the state Office of Energy and Planning. That compares to the average price of $2.67 for September and $2.42 for October 2009.

Ironically, the so-called 'fundamentals' of the home heating oil market are good, according to analysts studying the market.

Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Mass., noted that there is a lot of excess capacity in both refining and production, that the transportation strike in France appears to be having a negligible effect on prices at the moment, and there is plenty of inventory of oil overseas.

Plus, demand for oil is off slightly in China, further suppressing global demand.

The Gulf oil disaster, meanwhile, doesn't appear to have had any effect on either price or supply, Ferrante said.

"During that episode, oil prices stayed stable," he said. "There were no wild swings in crude."

Crude oil, which comes off ships before it is processed, is the benchmark used to establish oil and gas prices. At the moment, the price is hovering around $80 per barrel. Most experts believe the price of crude will stay between $80 and $85 per barrel, most likely leading to higher prices for consumers.

According to Mueller, the OPEC countries "like that price."

With all of these global forces affecting pricing, there isn't much the average consumer can do, except turn down the thermostat, keep their heating systems tuned up, insulate their homes, and go on a budget payment plan, Ferrante said.

"Tune-ups save 10 percent a year off the heating bill," he said. "And dealers are offering 12-month plans, which stretches out fuel costs over the year."

Bill Ermer, owner and president of Ermer Oil Co. in Atkinson and other dealers said more customers are opting for budget plans when they purchase their oil for winter, while fewer people are choosing fixed-rate pre-buy contracts.

With the pre-buy contracts, customers often pay a lump sum to the dealer, guaranteeing they will receive a fixed or capped price even if the price of oil soars.

But they can also backfire on consumers.

Like Ermer, LaRochelle said the traditional pre-buy contracts are not as popular in the past, especially after two years ago when the price of oil plummeted after many people had already locked in for the season. Although his company offered the pre-buy contracts, they didn't advertise them because they have become a burden for both dealers and customers.

"Pre-buys are a gamble," he said.

Just what the price of oil is going to do next may be difficult if not impossible to predict, according to local oil experts.

Bob Garside, president of the Oil Heat Council of New Hampshire, said the instability of the market makes it difficult to accurately gauge fuel prices for the upcoming winter.

"You can't make predictions," he said. "I wouldn't even dare make a prediction. It's too soon to tell."

Click here to read the full article from the Eagle-Tribune

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