Good News: Signs Point to Relatively Low Heating Oil Prices Through End of Winter

We are about halfway through the 2008-2009 heating season, and so far heating oil prices have made for good news.  After hitting all-time highs last summer, heating oil prices began declining in August and continue to fall as 2009 begins.  In July, many heating oil customers feared that prices would keep climbing to $5 or $6 a gallon by this time, but the opposite has occurred: the spike has passed and heating oil prices have returned to earth.  Members of buying cooperatives like HEAT USA receive discounts on heating oil no matter what the market price is, but low prices such as we are seeing now are good news for everybody.

The most recent Short-Term Energy Outlook, published by the U.S. Department of Energy’s Energy Information Administration on January 13th, predicted a 25 percent decrease in average heating oil prices from last winter.  Although some factors (such as the unusually cold temperatures residents of the Northeast and Midwest are currently experiencing) might cause small price spikes, those sudden increases will most likely disappear after a few days.  So what is bringing the relief from high prices?

The causes of low heating oil prices are numerous, but here are a few of the main factors behind low prices right now:

Low crude oil prices. While the recession affecting the U.S. and much of the rest of the world has been hard on stock markets and other investments, banks, and corporations, it has also brought about huge declines in demand for crude oil.  As demand has fallen around the world, it has driven down the price of crude.  Since the recession is not showing sings of letting up in the next few months, we can assume that crude prices will stay relatively low (under $60 a barrel) until the end of the heating season.

Huge stockpiles of crude and heating oil. Inventory data released on Wednesday by the EIA showed that quantities of stored crude oil and heating oil continue to increase.  Traditional storage facilities are so full of oil that many companies are hiring massive ships to store millions of barrels of oil at sea.  Distillate inventories, which include diesel fuel and heating oil, rose by more than 6 million barrels–a five percent increase in just one week!  The enormous crude and heating oil stockpiles provide a sort of price buffer, so even if a minor supply disruption took place, prices would not be affected for days, weeks, or even months.

Increased refining of heating oil. Beginning last summer, when crude and gasoline prices were at record high points, Americans began to drive less, and have continued to cut back on mileage through today, lowering demand for gasoline every month since September.  As a result of lower demand, gasoline prices have dropped and now offer less profit to oil companies and refiners.  Because gas is less profitable, refiners have started to step up production of other petroleum products such as jet fuel and heating oil instead.  These other fuels offer them larger (though still small relative to six months or a year ago) profit margins.  Increased heating oil production means more heating oil on the market, which means lower prices.

As with all price forecasts, this one requires a warning that one unforeseen world event (a political coup, a pipeline malfunction, etc.) could drive crude and/or heating oil prices up sharply in a matter of hours. Nevertheless, it is always nice to see heating oil prices going down.   Barring a major event, the outlook for heating oil prices to the end of the winter is a positive one for oil heat customers.

For the first time in a long time, heating oil users have reason to rest easy. The above factors have combined to make the odds of big price increases (like the ones we’ve seen recently) occurring this winter extremely slim.  Even with low prices, remember to keep conserving heat and energy- always the best way to protect yourself from unexpected price increases.

This article first appeared in the January 16, 2009 edition of the HEAT This Week email newsletter