Why do heating oil prices fluctuate?
Heating oil prices paid by consumers can vary for a variety of reasons:
- 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.
- Changes in the cost of crude oil—The cost of crude oil is a major component of the price of heating oil. Crude oil prices are determined by worldwide supply and demand. Demand can vary worldwide based on the economy and weather in addition to other factors. Supply can be influenced by weather events in the United States and by political events in other countries. The supply of oil produced by members of the Organization of the Petroleum Exporting Countries (OPEC) can also affect world crude oil prices. Visit oil prices and outlook to learn more about specific factors that can influence crude oil prices.
- 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.
- Regional operating costs—Heating oil prices also are affected by the cost of delivering heating oil to remote locations. The cost of doing business by dealers can vary substantially depending on the area of the country where the dealer is located.
What causes a surge in heating oil prices?
Home heating oil prices can sometimes change dramatically for a variety of reasons. When refiners, wholesalers, dealers, and consumers have enough heating oil in storage, and if temperatures do not drop or if crude oil prices do not increase rapidly, retail prices may hold fairly steady. A large cold weather system can impact supply, demand, and prices. People typically use more fuel at the same time delivery systems are interrupted, such as during a winter storm.
During cold weather, the amount of heating oil in storage may be used much faster than it can be replenished, and refineries may not be able to keep up with demand. Wholesale buyers become concerned that supplies are not adequate to cover short-term customer demand, and they bid up prices for available product.
In the Northeast, for example, additional supplies of heating oil may have to be delivered from other parts of the world like the Gulf Coast or Europe. Transporting heating oil from these sources to the Northeast is expensive, and delivery can take several weeks. During that time, storage inventories drop further, buyers' anxiety about available short-term supply rises, and then prices rise—sometimes sharply—until new supply arrives.