fixed-capped-oil-prices

Before each season, oil heat delivery companies determine a fixed price or a price margin for locked-in oil price contracts. Fixed price means you’ll be paying the same oil price throughout the year, regardless of the market conditions. If oil prices go up or down, your price remains the same. Capped price on the other hand means that you’ll be paying a certain price throughout the duration of your contract but your price may go down if the market goes down significantly. Your price will not go up higher than your capped price if the market goes up.

This fixed price does not depend merely on the long-run estimation from the company. The core variable is the downside protection insurance premium. Most oil companies will insure their locked in or capped price plans with downside investment protection from insurance companies. This way they protect themselves if the prices go too high. In another scenario, when the prices go up significantly, the end customer will benefit, but the delivery company won’t suffer much as they have already outsourced the risk to the insurer.

What is a price cap or fixed price program? What is the difference between the two?

If you sign a contract for a fixed price program, you will have a predetermined price for all the oil you order throughout the season. You can make plans according to estimated consumption only, and you don’t need to worry about the oil prices going up or down throughout the season. However, in times when oil prices vary a lot, as is the case today in 2016, the fixed price determinant will be much above current prices of oil or average market price for the last several months. A partial solution which is somewhat more cost-effective.

A price cap is the maximum price at which a company will sell heating oil to you under a contract. It can go lower than that, but it won’t exceed. Note that the price cap level is usually even greater than the fixed price one. Additional risk is that under a price cap contract deliveries will be more sensitive to market price hikes. For example, you can go for a price cap contract today, and the company will define $3 per gallon price cap – which is already too high, and is beneficial for the company as long as Brent crude oil price is $70 or less. Currently Brent is at around $46, which is the highest price for last six months. They can offer you to fill your oil tank immediately at $2.50 per gallon – still a bit higher than current COD prices. But if the prices of Brent oil on NASDAQ keep rising you will reach price cap as soon as Brent reaches $55 – and then you will pay as the price is $70! So, in most cases capped prices are not the best choice. Even if the prices of oil go another way, the companies will not be willing to lower it down much.

When to sign an oil contract

• when you are certain that prices of oil will keep rising, as was the case during the US Army invasion in Iraq 2003 through 2007. Major war or political events in oil-exporting countries can tell if the oil price will rise over a mid-term (6 to 12 months) or long term. Sometimes severe weather or major natural disasters around world’s largest oil fields can also push prices up.
• When the contract includes heating equipment maintenance. This way you get warranty on your heating system and you will be protected from any issues and system failures. Please keep in mind that contracts never cover all parts and repairs. Be sure to read your contract carefully to see what is covered and what’s not.

However, oil price under this type of full service contract can be so high that when compared to COD oil you overpay a lot – usually hundreds of dollars, and even if the system breaks down it would be cheaper to repair for the amount you save by ordering COD oil instead.
Also, you can buy high-quality COD oil at current market price which will certainly not contain particulates, debris or water, and will promote a good state of your tank and furnace. Speaking of scheduled maintenance, you can do some basic tasks on your own, while scheduled annual maintenance is not very expensive. Including maintenance in oil delivery contract will often not justify the price you pay in the end.

How do I save with COD oil?

Cash on Delivery oil price is always the cheapest option in the short term. The price of oil always depends on supply and demand. Demand is normally always greater during the cold part of the year (i.e. October through March) while off-season prices may be substantially lower. So filling your tank off season will often prove as a good deal for you. You can also learn to tell and recognize circumstances which may lead to abrupt price hikes. Learn to forecast crude oil prices, see which events pushed prices up in the past. Also, follow long-term (10 to 15 days) weather forecasts during season. Modern weather forecasts are highly accurate over a long term, and once you see forecasts giving high chances of freezing weather in the next seven days, order oil immediately. Once the very cold weather approaches demand for delivery will jump, and you will not just be put at risk of fixed price, but also lack of availability of oil. It’s always good to have at least one third of your tank filled anytime. If your tank is worn out and you are going to replace it, opt of as big one as you can afford – it will reward you with greater autonomy. You can also get good discount for large amounts ordered at once. And you will be at a lower risk of running out of oil during the course of the season.

One of the good sides of Cash on Delivery (COD) is that you can compare oil prices and find the cheapest dealer at the moment. This makes the cheapest oil ordering plan even cheaper.

Why do oil prices fluctuate?

The reason is the same as for gasoline for cars – heating oil is made of crude oil, and the price of crude oil is the largest determinant of the oil heat price. Besides crude price, local supply and demand, weather conditions during the season and some other things may play a role in determining the price of heating oil, though crude oil price remains by far the most important reason for oil heat being too cheap or expensive from time to time.