The Factors That Affect the Price of Heating Oil

There are more than six million homes in the U.S. alone that depend on heating oil. That kind of number is an indication of how big the market for this source of heating is. By definition, heating oil is a petroleum distillate that comes from the liquid separation of crude oil. Because of it low viscosity, it was discovered to be very feasible for fueling furnaces and boilers, the purpose of which is to provide heat and warmth against a cold weather in buildings and living spaces.

(image credit: BoilerJuice.com)

For decades, heating oil has been the most consistent, reliable, and dependable source of heat in homes. But one thing that supporters of other sources like natural gas, electricity, and propane contend that the price of oil is putting those who use heating oil in a tough spot. They say that the prices can be a bit unstable.

Is it really true? If that’s the case, what are those factors that affect the price of heating oil in the market? Let’s find out.

In a website called FuturesKnowledge.com, we found this post titled “The Top Factors that Move the Price of Heating Oil” that provides good information with regards to addressing the issue of heating oil prices being unstable.

Composite cost of crude oil acquired by U.S. refiners

That heating oil is a product of crude oil makes its production, distribution and consumption heavily dependent on the price of crude oil. In general, whatever affects the price of crude oil also affects the activities of the producers, distributors and consumers of heating oil. The thing is if there are fears of some crisis affecting the supply of crude oil, which ends up pushing the price of crude oil upward, you can also expect that issue to affect the price heating oil, since whatever tapers the supply of crude oil would also taper the production of heating oil. The chart below shows the historic relationship between the prices of these two commodities.

Price of alternative heating fuels

As you probably already know, heating oil isn’t the only available heating fuel. Natural gas and kerosene are examples of other heating fuels. Now, during very cold winters, and if the price of crude oil remains stable, there are chances that the price of other heating fuels may rise higher than the price of heating oil. This would normally encourage consumers to switch to heating oil, thereby, driving the demand for heating oil in the process. The increase in demand, in turn, pushes the price of heating oil upward. In addition, if any event, other than weather condition, affects the price of alternative heating fuels, you can expect that heating oil would follow suit.

See the rest here.

It may be true and accurate to say that the price of heating oil is greatly affected by the price of crude oil. The simplest explanation for this is because heating oil literally comes from crude oil. However, it isn’t entirely correct to say that the price is entirely dependent on one factor alone. We’ll learn later on that there are other factors that can play a role, too.

For instance, in this article titled “Why Do Heating Oil Prices Fluctuate?” from EIA.gov, there are two other things that can also prove to be crucial in determining the price of heating oil. See them below:

Seasonality in the demand for heating oil—When crude oil prices are stable, home heating oil prices tend to rise in the winter months when demand is highest. A homeowner in the Northeast might use 850 gallons to 1,200 gallons of heating oil during a typical winter, and then they may consume very little during the rest of the year.

Competition in local markets—The number of heating oil suppliers in a particular region can affect the level of price competition in that area. Heating oil prices and service offerings can vary substantially in locations with few suppliers compared to areas with a large number of competing suppliers. Consumers in rural locations may pay higher prices for heating oil because there are fewer competitors.

Source: http://www.eia.gov/energyexplained/index.cfm?page=heating_oil_factors_affecting_prices

So even if the price is crude oil is high, there is still a possibility that heating oil prices remain low or stable simply because there is little demand for it, like when it is summer. Also, if a specific area, say a city or town has several heating oil delivery companies competing for huge share of the market, then competition plays a vital role in prices. The more providers there are the more stable and competitive the prices become.