The winter heating season has gotten off to a shaky start for heating oil dealers in Rhode Island.
After sweating out an unseasonably warm November that cut sharply into early sales, the dealers still must contend with erratic oil prices and a possible inventory shortage in the Port of Providence if there is a long cold spell.
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To combat that uncertainty, operators hedge their bets when purchasing oil on the wholesale market and they strive to provide superior service, to win customer’s loyalty even if they can’t offer the best price per gallon.
“We just try to concentrate on what we can control,” said Carl Banker, president of Wood’s Heating & Oil in East Providence.
Oil dealers last week were charging customers an average of $2.45 per gallon, according to the R.I. Office of Energy Resources. But last summer, when many dealers started buying their supply, the wholesale price was as high as $2.90 per gallon, said Michael Januario, president of Sunshine Oil Co. in Bristol and an officer of the Oil Heat Institute of Rhode Island.
Many dealers hedge their investments in a volatile market by buying oil over several months then offering a fixed price for customers, based on the average price they’ve paid. This fall’s sharp reduction in heating oil prices, at a time when prices typically rise in anticipation of the heating season, put those dealers at a competitive disadvantage.
Enrollment in Dupuis Oil Co.’s fixed-price program is one-third less than last winter, as customers who waited until fall to buy heating oil were wooed away by better prices elsewhere, said Mark Dupuis, an owner of the Pawtucket-based company.
“We lost some business,” Dupuis said. “This year, summer ended and the price of oil went down 30 cents in three weeks. By the time we marketed the [fixed-price] program in September, it didn’t seem competitive.”
With current wholesale oil prices significantly lower than this summer’s, even many customers enrolled in fixed-price programs are lobbying their dealer for a price break. The pressure to reduce prices to retain customers is especially great for smaller dealers, Januario said.
Many dealers buy options that cap the price they’ll pay for heating oil during the season, enabling them to lower their prices if the wholesale prices drop.
Those options have become more expensive in recent year. Today, they cost about 12 cents per barrel, which dealers typically pass through to consumers. That sometimes makes their heating oil more expensive than what other dealers can offer.
So far this winter, however, dealers who use price caps have been able to offer a more attractive price, because they didn’t lock in at the cost of oil six months ago.
Colder weather, which increases demand for heating oil, is eagerly anticipated by dealers.
At Sunshine Oil, Januario said, November sales of heating oil were 20 percent less than expected because of balmy weather throughout the month. Meteorologists are now forecasting an unseasonably warm second half of December, followed by a typically cold January and February.
But if demand increases – or if OPEC cuts oil production, which it is considering – wholesale prices for heating oil might rise again.
And the possibility of a cold winter with record-high prices presents another challenge for heating oil dealers: cash-flow problems caused by customers who fall behind on their sky-high heating bills.
“Obviously, the higher the price is, the longer it takes to get our money,” Januario said. “Wholesalers need payment in 10 days, but it typically takes us 30 or 40 days to get our money. Some dealers have gotten hurt in the past, if they’re not hedged properly.”
Today, most oil wholesalers and banks require heating oil dealers to sign personal guarantees to secure credit lines that protect the dealers against cash-flow problems.
Statewide inventories of heating oil are currently well above the five-year average, but local dealers could face shortages during a sustained cold spell, especially now that a new federal regulation has reduced the heating oil capacity at the Port of Providence.
The port’s heating oil storage is at about one-quarter its historical capacity because, under a federally mandated gradual conversion to ultra-low-sulfur diesel, oil companies at present must store both grades of diesel.
“If there should be a brutally cold winter, if the harbor is frozen or wind conditions can’t bring barges in, supply may get tight,” said Banker of Wood’s Heating & Oil.
Such a shortage would especially hurt dealers with price caps on their heating oil purchases who don’t have oil secured at the port, Dupuis said. Those dealers would have to take a back seat if oil prices rose significantly and they needed to liquidate a call option, he said.
