Oil Pricing
A. Background
There are many variables that affect what consumers pay for home heating oil. First, however, you must understand what affects crude oil pricing. Crude oil, sometimes colloquially called black gold, is a thick, dark brown or greenish flammable liquid, which exists in the upper strata of some areas of the Earth’s crust; it is an important “primary energy" source of which heating oil is derived.
Once a significant crude oil reservoir is identified, wells are drilled for the purpose of pumping the product to the surface; from there, the crude is transported (usually via pipeline) to tankers (usually ship) where it is then transported to refineries. At the refineries, the component chemicals of petroleum are separated by a process called distillation. Products based on refined crude oil include kerosene, fuel oil, benzene, gasoline, paraffin wax, asphalt, plastic, etc. From the refineries, the end products are once again transported (whether by tanker, barge, truck or a combination of the previous) to distribution hubs where wholesalers buy the product and sell it to retailers such as ourselves. Therefore, and ultimately, fuel oil (heating oil) prices are directly related to crude oil.
The modern history of oil began in 1853 with the discovery of the process of oil distillation. The American petroleum industry began with the discovery of oil in 1859 near Titusville, Pennsylvania. The industry however grew slowly and did not become a real national concern until the early part of the 20th century; the introduction of the internal combustion engine provided a demand that has sustained the industry to this day. Early “local” finds like those in Pennsylvania and Ontario were quickly exhausted, leading to “oil booms” in Texas, Oklahaoma, and California. Other countries had sizable oil reserves as a part of their colonial holdings, and started to develop them at an industrial level.
While even in 1955 coal was still the world’s foremost fuel, oil began to take over. Following the 1973 energy crisis and the 1979 energy crisis, there was significant media coverage of oil supply levels. This brought to light the concern that oil is a limited resource that will eventually run out, at least as an economically viable energy source. With this media coverage and world concern, this led the New York Mercantile Exchange (NYMEX), the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, to pioneer the development of energy futures and options contracts 26 years ago as a means of bringing price transparency and risk management to this vital market. This market was brought together to somehow provide a hedging tool for the producers and consumers of the actual product.
And so, crude oil has become the world’s most actively traded commodity, as well as the world’s largest-volume futures contract trading on a physical commodity. Heating oil, accounting for about 25% of the yield of a “barrel” of crude (42 gallons), the second largest “cut” after gasoline, is also traded on the NYMEX . The heating oil futures contract trades in units of 42,000 gallons (1,000 barrels) and is based on delivery in New York harbor, the world’s principal cash market trading center.
Pricing of these contracts is therefore reliant on many factors, including: the price of pumping from the ground, the costs of refining and distribution, transportation, from taxation and profits by the various governments and companies in the custody chain between producer and consumer, the laws of supply and demand, and finally, by the “speculator” (third party profit seekers who “trade paper” of the commodity and never actually take possession of a single gallon of physical product, similar to stocks or bonds).
These “speculators”, such as mutual funds, pension funds, hedge funds, money managers, etc. can fluctuate the price widely in response to crises or recessions in major economies, because any economic downturn reduces the demand for oil. As an example, a recent low point was reached in January 1999 after increased oil production from Iraq coincided with the Asian financial crisis, which reduced demand. The prices then rapidly increased, more than doubling by September 2000, then fell until the end of 2001 before steadily increasing, reaching US $40 to US $50 per barrel by September 2004.
Today about 90% of fuel needs are met by oil. Petroleum's worth as a portable, dense energy source powering the vast majority of vehicles and as the base of many industrial chemicals makes it one of the world's most important commodities. Access to it was a major factor in several military conflicts, including World War II and the Persian Gulf War. About 80% of the world's readily accessible reserves are located in the Middle East. The USA territory has less than 3%.
B. Actual
So how can you, the consumer, know what the current wholesale price of home heating oil is, and what kind of price can you expect to pay us, as your retailer, per gallon? Well, with the advance of computer technology, it is pretty simple.
Visit the following link on your web browser to the NYMEX home page for heating oil contracts:
http://www.nymex.com/jsp/markets/ho_fut_cso.jsp
At this link, click “I agree” to the terms, and then go to “Markets”, “Energy” then “Heating Oil”. Once on this page, click on “Current Session Overview”. You will see something similar to this:
| 04/18/2005 | Current Session Overview | |||||
| Open High | Open Low | High | Low | Most Recent Settle |
Change | |
| May 2005 | 1.4710 | 1.4590 | 1.4710 | 1.4440 | 1.4599 | 0.0179 |
| June 2005 | 1.4650 | 1.4600 | 1.4770 | 1.4510 | 1.4638 | 0.0135 |
| July 2005 | 1.4730 | 1.4720 | 1.4840 | 1.4600 | 1.4718 | 0.0120 |
| Aug 2005 | 1.4850 | 1.4830 | 1.4900 | 1.4760 | 1.4798 | 0.0110 |
| Sep 2005 | 0.0000 | 0.0000 | 1.5040 | 1.4800 | 1.4903 | 0.0100 |
| Oct 2005 | 0.0000 | 0.0000 | 1.5090 | 1.5090 | 1.5043 | 0.0085 |
On the futures market, the above table shows the pricing of heating oil with New York Harbor delivery for the next six months. In other words, we can buy one future contract of oil (42,000 gallons) for May delivery at a price of $1.4599 per gallon, or for June delivery at $1.4638 per gallon, etc.; add to this the price of transportation (usually barge) from NY Harbor to a wholesale terminal and wholesaler profit (this usually comes to about $0.10 to $0.20 cents per gallon, depending on supply and demand figures at time of delivery) and finally add our margin (this includes expenses and profit and varies on the quantity purchased)
On the cash market, (i.e. today’s price), you must look only at the next immediate month’s pricing; in this case, at May 2005 contract information. What this table shows is that the cash price of heating oil settled at $1.4599 per gallon; add to this price roughly $0.10 to $0.20 cents per gallon, and you have an approximate price of the current wholesale price (again, depending on current supply/demand). One can also see from this table that the wholesale price of oil will rise by exactly $0.0179 cents per gallon for the next business day. In other words, the cash price of heating oil will change exactly as the change of the next month’s contract after 5:00pm. So, for example, if today’s wholesale price is $1.6000 per gallon and the market settled at +0.0179, then the price after 5:00pm today will become $1.6179. If, for example, the change was –0.0500, then the price after 5:00pm will become $1.5500, and so on.
C. Your Price
In addition to the wholesale price of heating oil, there are many more add ons to consider in order compare what determines your price. They are (in no particular order): administration, insurance, taxes, payroll, equipment & equipment maintenance, etc..
This, of course is just for fuel needs. Now, consider the price you pay to have heating service and repairs. This then, must include additional payroll, service parts, insurance, etc.
We offer however, several , affordable options to consumers for their fuel oil needs. Actually, our pricing programs are some of the most innovative in the industry, providing our customers with a unique combination of flexibility, cost savings and price protection. Each plan is carefully orchestrated to suit the customer’s individual needs. They are:
- Fixed Rate Pricing: Your price is locked in for the entire period, no matter what market prices do (up or down).
- Capped Rate Pricing: Your price never rises above a pre-set capped price, and, if market prices drop, you pay the lower price. This option involves a premium for gallons protected.
- Market Pricing: Your price fluctuates according to the market i.e., world prices.
- Pre-buy Pricing: Your price is pre-determined and pre-paid for all your fuel needs in advance.
Join one of our price protection programs today! Call us for more details at (718) 435-2200.