Last summer oil was range bound from early July to late September with WTI (West Texas Intermediate) crude trading between $75 to $95 per barrel, with an overall bias in the mid to upper 80’s. Then as winter approached and the Federal Reserve announced a third round of Quantitative Easing oil began a slow but steady up trend that crested on February 14, 2013 with crude at $110 per barrel. Last year’s pattern (2012-2013)is rather similar to the previous year. In both cases oil prices crested in February, forming a double top (which means it tried and failed to make a new high) and signaling a change in trend. As we entered March a weak down trend slotted into place, with the downtrend accelerating in April.
photo by A.J. Marro Copyright 2009 Rutland Herald
Prices have now fallen to the $90 per barrel range and continued price drops may or may not be around the corner. In the last full weak of April, oil prices have at least stopped their slide bottoming out the day after the Boston Bombing; and the bear market, for the time being, appears to be over. Oil is now in a 6-week sideways range with a low of $90 per barrel and a high of $96.
Heating oil is about 15 to 20 cents higher than last year’s low. It is interesting to note that last years low for the year came in June. Of course it is too early to tell when the low will come this year but I tend to think we are getting close to it.
One important issue to consider is the continued rise in US energy exports. This is a very new issue to consider and while it is good for the overall economy, it is not great news for US energy consumers as it means we have to compete for domestically produced energy with the European and Asian markets. Couple this with the fact that Brent Crude (the European benchmark crude) is currently $8 a barrel higher than the WTI (West Texas Intermediate, the American benchmark Crude) and we end up paying anywhere between 20 to 35 cents more for our gasoline and heating oil in order to keep our refined products from being exported. In fact we are now exporting record amounts of distillate (and to a lesser extent gasoline) to Europe. Since the 1970’s we have consumed almost all the oil and refined products we’ve produced but since the great price spike of 2008, US consumers have reduced their consumption, increased production of crude and kept refinery levels high. This has led us to export refined products. Another way to put it is that oil traders have an arbitrage window where unless we pay the effective Brent Crude price on refined products, the refined products will get shipped to Europe. During the heating season, we were paying that price for heating oil. Now that summer is here and heating oil demand has dropped off, a large portion of our heating oil output is being shipped to Europe. This basically means that although prices are in retreat, the supply of heating oil is not building and we could well be at risk for an old-fashioned supply and demand price spike this winter.
What could cause oil to continue its pull back? In short, continued slow economic growth here and in China, and continued recession in Europe where some countries' unemployment numbers are in double digits.
Other factors that could push prices lower include: Continued lower demand for oil; Action by the CFTC to curb speculation via the Dodd Frank Act; A reversal of fed policy regarding the extreme low interest rates they offer the big banks (don’t hold your breath on those last two).
What could cause oil to rally up? Signs that economic growth is about to pick up either here or abroad; Strength in the Euro (not too likely as they have a whole basket of countries in distress); A resumption of Disruption of supply; Hurricanes heading toward the oil regions in the Gulf of Mexico or refineries on the East Coast.
If I had to guess which way oil is going to go, I would say there is more of a downward bias but at the end of the day there is no sure way to know. Oil can rally or sell off in a matter of hours in a way that is truly incomprehensible. The daily ranges of pricing can be over 10 cents a gallon.
All this volatility leads me to believe that a fixed price with downside protection is the safest bet to hedge your oil needs. Look at it like this: If you lock in without downside protection you are making a bet that oil will rise, if you don’t lock in at all you are betting that oil will fall. If you lock in with downside you are hedging your bet, not only that but you are quantifying your risk at .20 per gallon.
I said the exact same thing last year but it is still equally applicable this year: At some point interest rates will rise. The Federal Reserve will not be able to keep lending at the “discount window” indefinitely. Higher interest rates will be needed to attract investors in government debt, and the Fed will eventually have to start to sell the massive amount of Treasury securities that it owns. When either event starts, commodity prices will fall.
Premiums Associated with Price Protection:
Currently there is a 15-cent spread between wholesale oil today and next winter’s futures contracts. This is built into the rate I have on offer because it is part of the cost of the futures contracts that I have locked into. Downside protection also has a 20-cent cost associated with it.
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.