I have dubbed this past heating season as “the Winter that Wasn’t”. Starting in November and continuing all throughout March temperatures were far above average in every month. Taken as a whole it was a record setting warm winter. Degree Days ran 24% warmer than average and as such most customers used less fuel oil this season than ever before. This coupled with a sharp drop in prices (for those who didn’t lock in) and most people enjoyed fuel bills that were half of what they were just two years ago.
Look at the chart below. This is an incredibly volatile 12- month heating oil chart. It should stand as a cautionary tale to all buyers and sellers of heating oil price guarantees. In early September it looked as if we were bracing for a surge in prices and then the bottom fell out. The Crude Oil chart is practically a mirror image of the Heating Oil chart.
What caused the collapse? The first of three main factors that are most often cited is the continued strength of the US Dollar. Since oil is a globally traded commodity, when the dollar is strong global commodities are cheaper here than in countries with other currencies. This past year as the value of the dollar continued to rise, all petroleum products fell in price. The second major factor in falling prices was an extension of the US energy boom. There are signs now that the US energy boom is slowing and perhaps even reversing. The third factor that accelerated the drop in prices was Saudi Arabia going against the will of the other nation members of OPEC and choosing not to cut back on production. This is likely because Iranian oil is coming onto the global market and all the other OPEC member nations are not truly willing to cut back on their production. OPEC member nations want someone else to cut back but their various government budgets are so under funded due to the low price of crude that Saudi Arabia is the only OPEC member that could “afford” to cut production. They have passed on such a move, and global crude output is near all-time highs and crude oil stocks are at all-time highs.
Where are prices going?
Here is where things get really interesting/confusing. The Fundamental supply-and-demand equation is very bearish and points toward a pullback in prices. Rising output from the Middle East has more than made up for a slowing of US production and there are ongoing concerns about global oversupply, not just in crude oil but also in refined products. Global economic data is bearish as well, particularly fourteen straight months of declines in Chinese factory activity, a three-year low in British manufacturing output and negative interest rates in many financial institutions in the Euro-zone. Balancing out the bearish fundamentals is the technical trading data.
The case for the bulls (prices rising):
Since early February 11th when crude oil prices hit a seven-year low, bullish sentiment from hedge funds, investment banks and utilities has seized price direction. From September 2015 to early February 2016 there were more sellers than buyers and prices were in full retreat. Seemingly overnight this situation flipped and now the opposite has occurred. For every seller of a futures or option contract, there are 5 eager buyers. This in fact is what is driving prices higher, at least in the short term. Whenever there are more buyers than sellers (or vice versa) volatility increases and we become at risk to massive price swings. As to why this has occurred there are multiple theories. Here are several that I give the most credence to. First, prices below $40 per barrel have put a large strain on the American energy boom. Most of the financing for the boom was secured when prices were north of $70 per barrel, therefore the revenue projections that secured the financing are in shambles and all new projects have been put on hold. Second, I think traders are making a bet that crude oil below $40 per barrel will be globally destabilizing and therefore unsustainable. Speculators are betting that oil in the $20’s and $30’s will likely cause unrest in many oil producing nations. Most of the governments in OPEC had grown used to oil north of $70 and were spending oil money like water to prop up there regimes. Third, there are reports that utilities have been buying futures contracts at an unprecedented rate in order to secure 2-5 years of product at prices that would have been unbelievably low just 18 months ago.
How it settles out in the next year:
To be honest, I have no idea. People smarter than me have lost millions and billions at what seems to me to be the world’s largest casino. In the past ten years we have seen prices as high as $140 per barrel and as low as $27 per barrel. The majority of the time it has been above $70 per barrel but as of the writing of this, Crude is at 44.50, far below the average. Just taking that bit of hard, indisputable data would suggest locking into a price now. But it is not that simple. In my own humble opinion, the Global economy is standing on clay feet. The most tangible evidence of this I can offer is the emergence of negative interest rates. While this is happening primarily in Europe and Japan it has a tremendous global impact. Think about that for a second. For almost the entire existence of banking, people who made deposits at financial institutions were paid a percentage on the money held there. Bankers would in turn lend that money out at a spread, something like pay the depositor 4% and lend the money at 7%. Now people are actually paying banks to hold their money. This is unconventional in the extreme. What is really causing this scenario is that in the absence of political will/government policy, central banks are desperately trying to stimulate economies by discouraging saving and ‘rewarding’ consumption. Long term this is not sustainable. It also encourages global wealth to search for yield in riskier asset classes than fixed income, hence the stock market keeps bouncing along and commodities attract massive speculation simply because money has to seek less stable assets in order to get yield. If the global economy can’t re-ignite, energy prices ought to go even lower than today’s prices. But as of the writing of this, prices have been moving higher for 3 months.
-Scott Sullivan, May 5, 2016
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.
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 few years Rutland has seen two 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 five 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.