Last year, Benvenuti Oil Co. Inc. in Waterford offered a price cap of $2.99 a gallon for home heating oil, meaning the consumer who bought the plan would pay that amount or less if the price dropped, but never more, even if the price rose.
Contracts for price protection programs usually start to take shape this time of year as dealers purchase oil ahead so they can sign up customers in June or July for the coming winter.
This year, however, Benvenuti and other heating oil dealers are holding off because of a volatile market.
With crude oil prices spiking last week as high as $4.50 a gallon in Connecticut and $3.99 in New London County, according to state figures, heating oil dealers and managers in southeastern Connecticut say they are eyeing the market for signs of stability that they ultimately expect but cannot predict.
Wilcox Fuel of Westbrook relies on its consultant, Hedge Solutions, to determine when to buy.
“They told us to sit tight right now,” said Wilcox co-owner David Foster. “There’s a bubble. The problem is we don’t know when it will break. When is a good time to buy? Unfortunately, we don’t know.”
Marc Mazzella, vice president of Benvenuti Oil, said the company also is holding off on setting a cap price.
“What we have doesn’t look good now, and I don’t see a benefit to it for the customer,” he said. “It’s hard to set a cap because of the market volatility.
“The cost to cap 1,000 gallons three weeks ago was $320. Last Thursday it was $580 to cap the same 1,000 gallons. So I’m not doing any caps now. I will, but not yet.”
Price protection programs include price-cap contracts, which enable consumers to lock in at a maximum, or capped, amount, pay a lesser price if the price drops, but never pay more than that capped amount if the price rises.
Pre-buy contracts allow consumers to buy heating oil up front at a fixed amount, potentially protecting the consumer from market fluctuations but also locking that consumer into one set price.
Unlike those two programs, budget plans typically start at a set price, but that price then fluctuates over the course of the plan, usually a year, as the consumer pays a set amount. Budgets work well for consumers who don’t want to get caught paying a large amount all at once when they run out of oil.
Since dealers, who sell directly to the consumer, have to take possession of and own most of the oil they are committing to sell, they, like the consumer, have a vested interest in seeing the prices drop. Yet, the opposite is occurring.
A repeat of 2008?
With prices that jumped in one week by 13 cents a gallon statewide and 14 cents a gallon in New London County, it makes no sense to buy now, Mazzella and other dealers said. Mazzella usually gives his customers several weeks to opt in to price protection programs, but this year customers may only have a week or two to decide.
“It’s going to be a really small window of opportunity this year,” Mazzella said. “It could be anytime between now and June.” Late in the week, prices were trending downward, but the erratic up-and-down gyrations need to settle out to make dealers comfortable buying, Mazzella added.
Industry and government experts say dealers’ conservative approach is sensible.
“They’re looking at these prices in the wholesale market and saying there’s a lot of iffiness here,” said Ray Wilson, director of the Energy office at the state Office of Policy and Management. “That’s a good assessment. It shows insight into the marketplace.”
They also warn that the coming year could be a repeat of 2008 if everyone is not careful.
Three years ago in July, heating oil prices spiked to a statewide average of $4.77 a gallon and a high of $5.50 a gallon, according to the state’s energy office. But by fall, the prices had eased back down considerably, and many consumers who had willingly locked into certain pre-buy contracts when the price was climbing sought to get out of those contracts when the price went back down.
At the time, then-Attorney General Richard Blumenthal found that most written contracts were legitimate. The market had simply worked against the consumer.
Market is erratic
Earlier in the week, crude oil peaked at just over $105 a barrel. Refined heating oil, which is what goes into consumers’ furnaces, hovered at just over $3 a gallon.
The crude oil market is erratic for a lot of reasons, including increased demand in India and China, and political unrest in the Mideast and Libya, but the speculation of traders has done more to drive up the price of crude than anything else, according to Eugene Guilford, executive director and chief executive officer for the Independent Connecticut Petroleum Association.
“We don’t have a clue anymore” about prices, said Foster, the co-owner of Wilcox Fuel. “It’s really driven by media news and Wall Street, and it’s disconnected from supply and demand.”
U.S. Rep. Joe Courtney, D-2nd District, said he’s trying to do something about that.
The Dodd-Frank reform bill passed last year grants the Commodities Futures Trading Commission the authority to limit some of the practices that enable speculators to trade futures without ever taking possession of the commodity. With new rules proposed, Courtney is trying to keep lawmakers from cutting the CFTC’s budget, which would make it difficult for the agency to enforce the new rules.
“This is really about consumer protection and keeping the markets transparent,” Courtney said. “What’s happening out there for home heating oil and at the gas pumps is reminding people that we need to stabilize these markets, and you just can’t let these outside forces create such uncertainty from one week to the next.”
Larry Chesler, president of Spicer Plus Inc., which owns Advanced Heating Oil, is considering offering price protection in addition to his traditional market-based pay-as-you-go pricing. The market cannot sustain the unrelenting climb, and will correct itself, he said, so the educated consumer should have options when considering price protection later this year.
“There’s no difference between the oil I buy and distribute and what other people buy and distribute,” he said. “In a saturated market where there’s many suppliers, the consumer becomes very
informed and informed and starts making decisions about who to do business with.”