Why do heating oil prices fluctuate?
Heating oil prices fluctuate for a variety of reasons:
- Heating oil demand is seasonal—When crude oil prices are stable, home heating oil prices tend to rise in the winter months when demand for heating oil is highest. A homeowner in the Northeast might use 850 gallons to 1,200 gallons of heating oil during a typical winter and consume very little during the rest of the year.
- The cost of crude oil changes—The cost of crude oil is a major component of the price of heating oil. Worldwide supply and demand determines the prices for crude oil. Demand will vary depending on factors such as the economy and the weather. Weather events in the United States and political events in other countries can affect supply. The amount of oil that members of the Organization of the Petroleum Exporting Countries (OPEC) produce can also affect world crude oil prices. Visit What drives crude oil prices? to learn more.
- Competition in local markets varies—The number of heating oil suppliers a region has can affect the level of price competition in that area. Heating oil prices and service offerings can vary substantially in places with few suppliers compared with areas that have a large number of competing suppliers. Consumers in rural locations that have fewer competitors may pay higher prices for heating oil.
- Regional operating costs can vary—The cost of delivering heating oil to remote locations can also affect heating oil prices. The cost of doing business can vary substantially depending on the area of the country where the dealer is located.
What causes large increases in heating oil prices?
Home heating oil prices can sometimes increase dramatically, especially during cold weather and winter storms. A large cold weather system can affect supply, demand, and prices. People typically use more fuel at the same time that winter storms interrupt delivery systems.
Increases in consumption can draw down the amount of heating oil in storage much faster than it can be replenished, and refineries may not be able to keep up with demand. Wholesale buyers may bid up prices for available product if they think that supplies are not adequate to cover short-term customer demand.
In the Northeast, for example, additional supplies of heating oil might come from other parts of the world such as 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 may drop further, buyers' anxiety about available short-term supply may rise, and prices may increase—sometimes sharply—until new supply arrives.