What happened last year?
This past heating season has been about 5% colder than the 10-year rolling average and a whopping 17% colder than last year. As a result, most customers had one or more extra deliveries this year. At the same time, Crude Oil and Heating Oil prices have increased about 30% from last summer. Weather and heating demand put all of the heating industry to the test. The span of extreme cold air from mid-December through mid-January caused local and regional supply issues. Oil was amply supplied downstream (in Montreal, Albany, and New York Harbor) but it had trouble making it to upstream markets in a timely fashion (Rutland County, Chittenden County , etc.). I am extremely proud to say that Rutland Fuel Co. met this incredible heating demand and did not run out of product.
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Other companies across the county were put on allocation by their suppliers, which caused automatic delivery delays and run-outs at precisely the worst time possible (sub-zero temperatures). The fact is, for a two-week stretch, I had to turn away other company's customers to ensure that I had the supply to meet the demands of our core customers. Thankfully for everyone, by mid-January this situation was alleviated and supply and demand came back into balance.
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Customers who locked into a guaranteed rate last summer paid, on average, about 40 cents per gallon less than those who chose a floating price (one that moved with the market). Wholesale prices have risen between 60 and 70 cents higher per gallon over last September, and WTI Crude Oil has risen from a 12-month low of $46 per barrel to a three year high of $68 per barrel in the final week of April 2018.
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Where are prices going?
I am not going to sugar-coat the situation. Prices seem poised to keep moving higher. For the first time in about five years, the fundamentals (supply and demand) and the technicals (charts and price movements that financial analysts use to predict price direction) have aligned in a very bullish pattern. When this occurs, steady (and occasionally sharp) price movement continues higher. The weekly highs are higher than previous weeks and the weekly lows are higher. The bottom line is that each month, prices net out higher than the last.
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Why the steady price increases?
Eighteen months ago, OPEC and Russia embarked on an implementation of production quotas. Ironically, the idea for production quotas was spearheaded by our erstwhile ally, Saudi Arabia. In the past, OPEC has had spotty compliance with production quotas. This time, compliance has been over 90%. US and Canadian producers have rushed into the void and have made an enormous difference that has slowed the move up and the market has been adequately supplied. However, over time the OPEC cuts have removed the excess crude inventory that has allowed us to enjoy gasoline and heating oil prices that were closer to $2.00 per gallon than $3.00 per gallon. in the short term at least, this appears to be over.
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What could flip this upward trajectory?
Often, when OPEC attempts to enact production cuts, the market will respond by moving prices higher. When member nations see higher prices, typically, they will cheat on their individual quotas (compliance is voluntary) and put extra oil on the market. The first member nations that do this usually make out very well, dumping extra crude production at top-end prices. This is followed by every other OPEC member rushing extra crude to the market in an effort to catch the premium before prices fall. And once they all try to get on it, price drops follow quickly. Although this hasn't happened yet, I am hoping for this pattern to repeat, and for prices to weaken and fail.
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Scott Sullivan, Spring 2018
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The Rutland Fuel Company has a variety of programs
available for those who wish to approach the coming heating season with
a strategy. We would be happy to discuss these programs with you
personally. Call us at (802)773-7400 or stop by our office for a chat.
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Why Choose Rutland Fuel:
If you are a consumer who prepays to lock in with a fuel dealer you should be very concerned with how your company hedges their fixed-price programs. The volatility of the price can blindside dealers that don’t hedge properly in a way that cannot be understated. In the past several years Rutland has seen three of its most prominent oil dealers get forced out of business due to oil price volatility. One dealer bought too much fixed-price oil and when oil dropped he was stuck selling oil nearly 2 dollars cheaper than what he paid for it. The other one (18 months later) apparently sold more fixed-price oil than he purchased and when oil rose, he was buying it for more than what his guaranteed rates were.
In times like these it is important you choose a fuel supplier you can trust. As oil has whipsawed up and down during the past several years, we have remained on a solid financial footing because I run these programs the right way: I lock into oil only for the customers who lock in with me. We don't speculate, rather we hedge our programs as diligently as possible. For fixed-price plans we purchase heating oil futures contracts and for CAP plans we purchase futures contracts with "put" option protection. I think what sets us apart is that we offer our fixed and CAP programs over a much longer period than most other oil dealers. The truth is that no one really knows where oil prices are going next, so I don't want my customers to have only a six-week window in the summer to set their price for the coming year. Instead, prepay customers can lock into some as early as springtime, and price out the rest later (during summer/into the fall) to average in their cost. For those who prefer to jump in all at once, they have a period of many months to decide when the time is right for them. And we offer discount programs for those who do not wish to lock in a fixed price for the winter season. We strive to maintain flexibility in our offers while protecting those who lock in, by covering their needs almost simultaneously when they lock in.
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