lock in or take my chances re heating oil rate?

October 1, 2008 1:16 PM

I'm looking for thoughts on whether I should lock-in a heating oil rate of 3.79 for the season.

FYI, I live in MA.
I realize that this is a bit of a crystal ball question, but if anyone has any informed commentary on the matter, it might help me make a better decision. I was going to lock in but rates have been recently dropping. I was thinking the drop might be a pre-election phenomenon and that prices might rise again post-election. But now with the economic crisis, I am flummoxed in trying to think about how that is likely to affect pricing/supply going forward. I'm not looking to take a poll as much as looking for reasoning about why I should or shouldn't.

posted by madamjujujive to home & garden (11 comments total)

I think Mass Energy can beat that price, actually.
posted by mkb at 1:29 PM on October 1 [1 favorite]

I look at heating oil as this: If I pay for it all upfront, I know for a fact what I'm paying for it. If I end up "losing" money when the price falls later, am I really losing that much? How much would I have bought at that time? Would I have enough to last until it hit that price? Would I have to re-fill later because I'm completely lame and only got about a hundred gallons as X price because I thought it was going to be cheaper, later?

Chalk my opinion up to pessimism. Or the fact that I've been that person who has ran out of heating fuel because I thought I would get it cheaper later. Oh, and I've ran out of gas along the side of the road for the same reason. I now just pay for it and cope.
posted by banannafish at 1:31 PM on October 1

As I type this, crude oil is about $98 a barrel, which is lower than it has been in past months but higher than this time last year. Where prices go from here depends on a lot of differrent factors, like the economy and how much demand there is because of weather.

It all boils down on how you feel about managing your own risk. That's what your oil company is doing for you by offering a lock. If you have a household budget, a lock will help take out some of the guesswork. Make no mistake though, you do pay a bit of a premium for not having to worry that the price won't go up before spring, and you won't benefit if there is a price drop.

There was a fellow where I used to work who would monitor the prices on a daily basis, and call for a fill when prices went down. If you have the time and inclination to do this, you could save money.

We're at the other end of the spectrum, and after some discussion have decided to stay on the keep full, where the oil company decides when to fill up, as we aren't particularly risk averse and don't have the time to micromanage our fill-ups. Historically it has worked out okay for us.
posted by SteveInMaine at 1:33 PM on October 1

Hi madamjujujive, my immediate intuition is to lock in. I don't expect things to get much better in terms of oil prices.

If you lock in you can then not have to worry about it all this winter. It will be one less stress and you can then, having determined the basic amount, then plan a budget accordingly.

Some articles found googling, Massachusetts oil winter 2008:

Locking in such protection makes sense in the summer when heating oil normally sells at a discount and consumers can expect prices to rise in the winter. This year, however, few households are willing to take a bet on where energy prices may be headed. Retail heating oil is selling today at around $4.50 a gallon, compared with $3.30 last winter and less than $2 a gallon only three years ago.

A grim forecast for heating costs
Report warns that average 2009 oil bill for Mass. household could top $3,000

The institute predicts that the price of oil will rise 10.75 percent from 2008 to 2009.

Price Of Home Heat Will Strain Some Cape Budgets This Winter

Northeast braces for home heating oil increases

Winter Heating Costs May Burn Consumers

Heating Oil Spike Has Northeast On Edge (with energy saving tips)

Almost all Americans will pay a lot more to heat their homes this winter, even though temperatures are expected to be warmer than average.
posted by nickyskye at 2:59 PM on October 1 [1 favorite]

Heating oil will have a relationship to crude oil and natural gas, and in the wholesale market, will always be worth less than crude, because all of the "good stuff" has been taken out of the crude and the heating oil is left.

$3.79 per gallon (US) is $143.22 per barrel. Crude is $98 per barrel per SteveinMaine above. Fuel oil should be less than that.

There are 42 US gallons of crude in a barrel. Paying $3.79 would thus suggest that you are paying ca. $1/gal over current crude spot price, which seems like, well, a very generous marketing allowance.

I would pursue what mkb said above - you can probably do better. Some marketers are probably sitting on heating oil they bought at the top of the market and are looking now to flog at a premium. I suspect that if you are going to overwinter, using a well priced heating oil based off $98 crude is probably a pretty sane thing to do. I think the downside to crude pricing is limited from here, while the upside is subject to wide fluctuation. On balance, shop around for your best price and lock in now.
posted by sagwalla at 3:42 PM on October 1

Here's a cloudy cyrstal ball that only works in the N.E. or Tri-State Region. All prices are for tankers (6500 gallons or more) that don't include transport or dealer mark-up. Any good at graphs?
posted by Mblue at 3:56 PM on October 1

I've never heated with oil, so I don't have a feel for the price.

The current cimatology forecasts for the NE say that there's a equal chance of an above or below temperature winters. So, that's a push.

The economy is heading into a deeper recession. This will depress demand (this is why crude has been falling.) This implies prices will drop *from where they are now.*

So -- the question is: What are prices now? There is a good chance they'll drop a bit. There's a slight chance they'll rise.

Balance that against the comfort of knowing that, no matter what, you'll pay $3.79/unit for heating oil this winter.

If, as mentioned above, heating oil is selling at $4.50/unit, I'd personally take the deal. It would have to drop considerably to make it a loser deal -- and if it did, the right answer would be to stop purchasing from hedged supplier and purchase off the open market, if there are more than one suppliers in the area. You'll need to check the terms carefully, there may be a minimum purchase requirement or lock in clause that would prevent this.

I will note that it is exactly this sort of deal that's kept Southwest profitable in the last few years (and the expiration of those hedges has really hurt them in the last couple of quarters.)
posted by eriko at 5:38 PM on October 1

This site has an overview of current prices in MA.
posted by XMLicious at 5:56 PM on October 1

I'm in Maine, and when I looked at oil prices last week (or so), I could get 3.29/3.39 for automatic delivery/call for delivery. This week, same dealer, 3.19/3.29. Earlier this summer, I got oil at 3.89 (my hot water runs off the furnace). Can you lock in N gallons at 3.79, and leave yourself open to paying more, or less, for the balance of your oil needs? Disclaimers: 2 people I know lost money last year on oil plans, so I'm biased. This is the 1st winter I've heated with oil in 20 years.
posted by theora55 at 8:43 PM on October 1

Thanks for the discussion and links. mkb, that's a great link and new to me, thanks; XMLicious, that site lets me know that in my town, I am in the ballpark for current pricing, but leaning a bit to the higher end; and nickyskye, your research powers are awesome to behold!

I am surprised to learn how much the price varies from community to community and supplier to supplier.

One thing I didn't note is that my current supplier is my landlord's preferred supplier and has a contract to service the furnace annually and show up in an emergency. They have been pretty dependable unlike two prior suppliers. I am not beholden to this existing supplier, but probably willing to pay a bit of a premium based on good service and dependability, but only to a point. My landlord might be open to a change - that Mass Energy site looks attractive and like a better deal might be available. The pricing there might even make a good bargaining chip for trying to negotiate a slightly better deal with my current supplier based on the three tanks and two contracts that they supply to my landlord.

I have until next week to decide. The risk discussion is good. I am a freelancer and based on the potential for adverse economic trickle down effects, I might do well to limit my risk and lock in. I forgot to mention that locking in requires me to pre-pay for xx gallons base on last year's usage. I don't anticipate losing any clients, but who really knows what the Main Street ripple effects of the recent economic reverses will be. But if I have my heat, at least I wouldn't have that worry if I lose any business. Also, I hadn't really thought about issues beyond the price. I hadn't thought through the effort it would be to get the really best deal - given my procrastinating propensity, I think I would suck at and hate doing month-to-month shopping and careful monitoring of my supply. And that with no certainty of savings.

Gee, everyone in the thread has said such incredibly helpful things in terms of issues I needed to think through - I could easily mark all of your suggestions as best answers. I really appreciate the input! I'll come back to let you know what I decide. And I will try to remember to update at the end of the season to let you know how it worked out.
posted by madamjujujive at 10:58 PM on October 1

Just a quick follow-up: I had been leaning to a contract, but with the recent drop in prices, I decided to take my chances this year. Thanks for all the posted info - it will be very useful in monitoring the pricing.
posted by madamjujujive at 9:03 AM on October 11