The fact that some 6.9 million households rely on heating oil in the US indicates that the heating oil market is huge. Heating oil is a petroleum distillate derived from the liquid separation of crude oil. It is of low viscosity and is used as fuel for boilers and furnaces in buildings. In here, we’ll discuss the top movers of the price of heating oil.
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.
Source: U.S. Energy Information Administration
As you would notice, in 2008, when the price of crude oil rose, there was also a spike in the price of heating oil. In addition, the dip that followed also coincided with a dip in the price of heating oil. Overall, you would notice that the price movement of the two commodities is closely related.
However, this should not lead you to believe that the price of heating oil is entirely dependent on the price of crude oil. If you consider the chart closely, you would find that there are deviations at times. Those deviations represent the effect of other factors.
Seasonality in the demand for heating oil
Historically, and especially when the price of crude oil is stable, the price heating oil responds to seasonal demands. As you would expect, during cold winters, the demand for heating oil would be high, which ends up moving the price of heating oil. In general, it’s safe to say that the colder the weather, the higher the possibility of a spike in the price of heating oil.
Northeast demand for heating
The effect of this might be little, but it’s worth a mention. In the US, the demand for heating oil is greatest in northeastern U.S. It was reported that, during 2012/2013 winter, about 5.5 million northeastern households relied on heating oil. In addition, it was reported that the extremely cold weather of 2014 drove the consumption of heating oil, which ended up driving the price of residential heating oil by 7 cents and wholesale heating oil by 5 cents.
Price of alterative 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.
For instance, a June 2014 Maine government survey said the average price of heating oil in the state dropped 4 cents over a three-week period to $3.54 per gallon. It was also stated that the prices of kerosene and propane fell 5 cents and 11 cents respectively, over the same period of time. You would notice that the increase in kerosene and propane were higher, suggesting that the increase in the price two commodities instigated the increase in the price of heating oil. And you should also note that June isn’t a winter month.
Improvement in building energy efficiency and insulation
Due to environmental concerns, improvements are being made on building energy efficiency. Such improvements have the potential of altering the demand for heating fuels, including heating oil. When demand drops, there are chances that price of heating oil would drop to reflect the demand spectrum. For instance, the number of household that relied on heating oil declined from 8.7 million households in 2006-2007 to 6.9 million households in 2013. In fact, the EIA projects that projects a 3% decline for 2013-2014. The Congressional Research Service reported that energy efficiency improvements in buildings are a key factor that reduced the demand for heating oil.
As with many commodities, governmental regulations can change the price structure of heating oil. More importantly, stiffer regulations can drive the price of the commodity high. What happens is that stiffer regulations tamper with the production process. It would usually shrink margins for producers. Therefore, to stay profitable, producers would have to increase the price of the fuel. Such effect can be seen in Philadelphia, where City Council passed a bill that places a low-sulfur requirement on heating oil.
While a number of factors have been discussed in here, it’s important to note that the biggest mover of the price of heating oil is still crude oil. The effect of the crude oil swallows up the effects of other factors. In reality, the effects of other factors are minimal and they can hardly be sustained over a long period, relative to crude oil.