I've been tracking the fuel oil market for the last year or so. Its fascinating, since it is the only market where consumers routinely employ hedging strategies. It is also an essential service, with numerous service providers. If you're paying too much (or think you are) switch. The price fluctuates wildly based on supply and demand and global oil prices. Oh, and by the way, if your system breaks in New England and isn't fixed (or emergency heat provided) within 24 hours, your pipes will burst causing $10K+ in damage. So quality of service and consistent delivery matter.
This file.xls shows the tracking I did over Winter 2004.
1) For 2004-2005, I used a service called HeatUSA. They serve as a buying group to bundle consumers into a higher volume and squeeze dealers for discounts. Of course, dealers pay for this service. For $25/year, I get their price on an automatic delivery plan, plus a full service contract. This contract is very valuable -- up to $200/year from other vendors. The contract also includes a cleaning (annual cleaning is considered mandatory for an oil furnance) worth about $50. HeatUSA was very difficult to evaluate, since they provide a floating rate that increases or decreases as market forces change. Their website has significantly improved this year and shows snapshot comparisons of HeatUSA prices vs. major competitors at points during the winter. The major competitors selected for RI are appropriate and all numbers are in line with mine (no gimmicks like a one-day HeatUSA sale).
2) Floating prices are the natural way to buy oil. Whatever the price is, thats what you buy. However, the essential nature of fuel oil means that you may be buying at a very unfavorable time. You can't wait a couple months as you would with cars or shoes. Or market forces may have completely changed, driving prices higher and busting your budget. Thus, many companies offer "caps" (the maximum price you will be charged). To receive a cap you normally must agree to automatic delivery and to stay with the company for the entire year. Automatic delivery is a benefit to the company for truck routing and workload issues. Some companies will guarantee an entire year at a fixed price. Normally you have to pay for the entire year in advance to receive this deal. Both caps and fixed price deals were extremely beneficial to consumers in 2005 since the market rose to sustained record highs. Caps were common in Summer 2004 around $1.55, fixed prices at $1.35. Meanwhile, the lowest floating price I paid was $1.812 with an average price of $1.936. Ouch.
3) Fuel oil companies should use hedging and derivatives to meet these caps and fixed prices. However, many screw this up, underprice their product, and face severe financial distress as a result. Their potential losses are unlimited. Someone lost a lot of money last winter. Hopefully, it wasn't the fuel oil companies, but I doubt it. There are rumors that Petro, the largest company, lost their shirt. Based on the deal my friends had, I can see it. I called two companies today and they are refusing to provide any pricing plans at all due to market volatility. Call back next month. Norfolk Oil is capping at $2.099.
4) The data in the spreadsheet shows the offering prices for 5 other RI vendors as well as HeatUSA. For RI, the HeatUSA vendor is Brennan Oil (who needs to update their website -- still have last years pricing plans). I have not found any local vendors who provide prices on their websites. Probably due to not taking the web very seriously and the need for daily updates. I, however, put much more stock in a good updated website, than a $50 free oil coupon and a brochure mailed to my home. Vendors are also notorious for giving new customers better deals than existing ones due to the troubles of transitioning. This is one of the most common ways to get business -- mailing to new residents based on property transfers. The prices for the five vendors are from orderoil.com. They are trying to provide an online marketplace for people to buy fuel oil, with user ratings. I don't think they're very successful.
5) To evaluate the vendor of a variable-rate product, you should look at the "margin". The Federal Government publishes an online newsletter called "This Week in Petroleum". It has the average retail and wholesale prices nationwide, and the average price for region 1A (New England). You can also compare against the NYMEX commodity prices. A fuel oil vendor is entitled to considerable margin since the product has to be trucked and delivered to your house. The appropriate comparison is difficult to determine -- I measure margin in the spreadsheet in comparison to national wholesale prices. Commercial customers will routinely purchase fuel oil contracts with vendors bidding on the lowest margin. I have not seen this offered to residential customers.
6) The HeatUSA average margin over Winter 2004 was 43.7 cents. Competitors ranged from 42.8 to 62.6 cents. Oddly, the 42.8 was Brennan Oil, the same provider. However, since I got a service contract at $25 instead of $140, HeatUSA turned out to be a good value for variable priced vendors (my worry of being ripped off led to the data collection). Strict comparisons using this data are dangerous since there are limited data points and the national indexes are only published on a weekly basis. The 42.8 vs. 43.7 may well be a fluke. However, the HeatUSA margin increased significantly from 36 cents to 46 cents (peaking at 51) over the course of the year. This is the big danger in variable pricing, in that a company will sell a lowball margin upfront and then significantly increase margins if supplies tighten or in the depths of winters. It is difficult to switch vendors in the winter since the service contract has already been purchased (which requires using that vendor) and other vendors may not have capacity for new customers. However, most of the other vendor margins were erratic or even showed a decling margin over the winter. This may also be part of the competitive dynamics of being listed on a common website -- several vendors were completely uncompetitive at the beginning and dropped prices to compete.
If you'd like to send me delivery data from your fuel oil company for 2004-2005 or your 2006 offer, I'll add them to the spreadsheet and conduct the margin analysis.
Winter 2004-2005 Average Margin
HeatUSA (Brennan Oil) 43.7 cents
OrderOil.com (Dupuis Oil) 48.6 cents
OrderOil.com (Brennan Oil) 42.8 cents
OrderOil.com (Douglas Oil) 52.2 cents (withdrew mid-season)
OrderOil.com (Wesco Oil) 50.6 cents
OrderOil.com (East Providence Oil) 61.6 cents
OrderOil.com (Sunshine Oil) 61.2 cents