Posted on 10/20/2008 6:00:10 AM PDT by thackney
The Rev. John L. Burton wasn't going to rely on divine intervention to keep his small church in Windham Center warm this winter.
Doing his best to protect St. Paul's Episcopal Church from skyrocketing heating oil prices, he signed a contract in late summer with a local dealer to buy fuel oil at $4.67 a gallon for the coming heating season.
By doing so, the congregation of 60 families committed to paying $5,000 more than last winter to heat its 175-year-old stone church. But with heating oil prices threatening to reach $5 a gallon by winter, Burton hoped to put a cap on spending.
Weeks later, the market price for crude oil began to drop, and so did the cost of heating fuel — down to $3.27 a gallon in Connecticut last week. That's $1.49 less than this year's high of $4.76 a gallon.
People who were getting ready to turn on their furnaces rejoiced. But there were losers in the game: the speculators who invested when oil was high, and the roughly 20 percent of Connecticut's heating oil customers who took a gamble and locked in a heating oil price.
"Now we're hoping for some divine aid," Burton said, lamenting the contract that his congregation had been reluctant to sign in the first place. "Really, we had no choice. We sat and watched the price go up. ... It's hard when you watch it go up for six months in one direction."
Those who locked in prices through heating oil cooperatives — groups of homeowners who bargain with dealers — have also seen the price of oil drop below rates they've already agreed to pay.
Kevin Donohue of Windham joined a group of 15 households who locked in this summer at $3.70 a gallon — what appeared at the time to be an attractive price — because he didn't want to "get killed" this winter.
"If I had known this was going to happen, I would've waited," he said.
Deciding whether, and when, to lock in a price for heating oil is a gamble that Donohue was prepared to take to give his family some financial stability.
"Oil prices go up. Oil prices go down. I just wanted to know what I was paying," he said. "We bought security. I'm happy with that."
Even some who waited and tried to lock in prices as they were falling are suffering in the declining market.
Lisa Fasciani, who runs Southbury-based CT Heat and Energy Consortium LLC, said that about half of her members have yet to bite at the group's contract offer of $3.69 a gallon, which is still higher than current prices, even though it was drafted in September."We waited so long, through July, through August and early September. We didn't actually lock in until Sept. 23, when it was going down, down, down," Fasciani said, "and then there was this six-day spike. We got caught right in that spike."
For those who signed lock-in contracts, there aren't many avenues of escape. Some heating oil dealers are finding themselves in the same bind as their customers. To ensure that they had oil to deliver to customers who locked in prices, they, too, had to purchase contracts with their suppliers, said Gene Guilford, president of the Independent Connecticut Petroleum Association.
"Consumers will ask: Is my dealer making a phenomenal amount of money off me now? The answer is, 'No,'" Guilford said. "You have heating oil dealers who purchased very expensive contracts that they can't get out of."
By state law, heating oil dealers had to buy contracts to cover 75 percent of the oil they would need to keep their commitments to customers who paid money up front for fixed-price contracts. After the price of oil peaked in mid-July, state legislators increased that requirement to 80 percent of the oil the dealers committed.
At the time, state officials feared that oil dealers might not be able to afford to deliver on their contracts locking in lower prices because their own costs would be even higher. Legislators looked to the recent example of F&S Oil Co., a Waterbury-based heating oil dealer that closed abruptly in March and left behind thousands of residents holding long-term contracts.
"Prior to July, it was like, 'Oh, my God, prices are going to $6. People are going to be eating dog food. People are going to die. The world is coming to an end,'" Guilford said. "Who would know that the middle of July would be the peak, and we'd see a huge decline?"
With the decline, the legislation meant to save prepaid customers from being victimized by financially troubled oil companies ended up binding them to above-market prices because dealers had already bought the oil to back up their contracts.
"We adhere to state law and, in doing so, we purchased a significant percentage of the oil we use to lock in," said Bruce Deitch, owner of East Hartford-based Kasden Fuel Co. "I can assure you, I don't think any of my suppliers have any wiggle room. It is what it is."
There is one rather costly escape route for locked-in customers: Pay a cancellation fee and walk away.
A few years back, when heating oil prices took a similar dip in the middle of the heating season, some customers paid $400 or so to get out of their contracts and joined oil cooperatives that base their discounts on the daily wholesale market price, said Mark Hutson, president of West Hartford-based Citizen's Oil Co-op Inc., which bargains with oil dealers for a discount. If heating oil prices drop below a certain point, he said, the cost of ditching a contract might be covered by the savings.
Earlier this year, state officials urged customers to just stay away from lock-in contracts in case prices skyrocketed and their suppliers couldn't deliver fuel oil at the lower price. That warning still applies, except now it's reversed because customers could miss out on current low prices.
"It's definitely ironic, but the market has been full of ironies as time goes by," said Julie Cammarata, a policy development coordinator with the state Office of Policy and Management. "I don't think anyone who is aware of how the markets work would've advised someone to lock in."
Oil dealers have attributed at least a part of the drop in oil prices to a recently passed federal law, proposed by U.S. Rep. John Larson, D-1st District, that banned private investors from buying and selling future contracts for crude oil unless they're buying some of the oil to use themselves. Industry leaders have said speculators, such as hedge funds and investment banks, drove up the cost of oil and gas by pouring billions of dollars into the futures market.
Crude oil has fallen — it traded under $70 a barrel at points last week — because of the broader market collapse, leading many to believe that demand for oil will decline in coming months as the economy slows further.
"The economic crisis is really starting to hit," said Tancred Lidderdale, a senior economist for the U.S. Energy Information Administration. "Right now, it's highly uncertain exactly where oil prices are going to head. It's really tied to economic growth and how severe this crisis is."
So for those who are still looking to lock into heating oil prices this winter and save a few bucks, Guilford offered this: "Anybody who thinks there's some kind of panacea here, that they can find a way to beat the market, go look at where your 401(k) plan is."
This was DBM driven hype. You heard it day in and day out - come winter, people are going to have to choose between staying warm and eating. Droves of people went out and bought wood burning stoves. Another case of "the sky is falling" DBM alarm that didn't pan out.
He could be a Wall Street broker.......
I feel his pain. If I had know what the winning lotto numbers were going to be I would have chosen those numbers.
Would he have prayed for the poor distributor who would have gotten screwed if prices kept rising? Ya pay your ticket and ya take your chances.
What does he need divine aid for? Couldn't he afford the contract when he signed it?
A smart seller will cut a deal with the buyer and avoid any messes with their customers.
Southwest Airlines is the fuel hedging master. Preachers...not so much.
Next these unlucky bettors will be whining to Obama that they want to be let out of these contracts.
Good reason to support the construction of about 70 new nuclear power plants nationwide.
Sorry to hear about your painful experience. I would seriously rethink my heating sources. Heat pumps work well in some climates. There are a lot of relatively cheap hot air solar panel retrofits that can cut your heating bills some.
“By state law, heating oil dealers had to buy contracts to cover 75 percent of the oil they would need to keep their commitments to customers who paid money up front for fixed-price contracts. After the price of oil peaked in mid-July, state legislators increased that requirement to 80 percent of the oil the dealers committed.”
That’s the problem, right there...regulations.
If the oil companies had been allowed to run their own businesses, they wouldn’t have been stuck with expensive oil contracts and they could give the customers a break.
This part came just a little bit past the headline....
For those who signed lock-in contracts, there aren't many avenues of escape. Some heating oil dealers are finding themselves in the same bind as their customers. To ensure that they had oil to deliver to customers who locked in prices, they, too, had to purchase contracts with their suppliers, said Gene Guilford, president of the Independent Connecticut Petroleum Association.
"Consumers will ask: Is my dealer making a phenomenal amount of money off me now? The answer is, 'No,'" Guilford said. "You have heating oil dealers who purchased very expensive contracts that they can't get out of."
By state law, heating oil dealers had to buy contracts to cover 75 percent of the oil they would need to keep their commitments to customers who paid money up front for fixed-price contracts. After the price of oil peaked in mid-July, state legislators increased that requirement to 80 percent of the oil the dealers committed.
That is why I always pay for the DOWNSIDE Protection.
If your company does not offer downside protection, find one that does.
That way you are always protected from the increase in price but get the benefit if the price falls.
FYI, your oil company MAY have covered their contract sales at the higher price, or the may have chosen to cover some part and take the rest short. This is what most companies around here did.
YES, you do IF you have downside protection.
That way you pay a maximum of $4.70 or you get whatever the cash discounted price at the time of delivery.
It is a no lose deal, except that you have to pay up front.
At the end of the heating season alot of people here in NH will have a credit with their oil company that will carry over to the next season.
However, you have to evaluate who you are entering this contract with. They have to be big enough and experienced enough to hedge their sales correctly.
Not exactly. There is no free lunch in this world. The oil company can not give you "down side protection" unless they charge you a risk premium. Think this through. They would not offer these plans UNLESS they were profitable TO THEM. plus paying up front give them use of your money also for the whole season.
P.S. Year, after year, after year, the cash/spot price will always be the cheapest route. Of course if you do not have the money to “self-insure”, you have to pay more for the “price insurance”. The rich get richer and the poor get poorer.
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