Wednesday, October 24, 2007

An Expensive Winter for Oil Users Ahead

Back in August I urged readers to lock in home heating oil prices or potentially face a huge heating bill this winter. For those who didn't, the news today is not looking good.

Last week, heating-oil futures hit a record of $2.36 a gallon, up more than 40% since the start of the year.

With weather forecasters predicting a colder winter than last year, despite the unseasonably warm October in the Northeast, heating costs will rise no matter what fuel a homeowner uses. Now, we know we can trust weather forecaster about as much as a crack addict but oil fundamentals are strained currently and ANY disruption to the system will cause prices to rocket even higher.

Consumers who use heating oil will feel the most pain as their winter heating bill for the season according to the US Department of Energy is expected to average $1,785 vs. $891 for households that use natural gas. Unlike crude oil, natural-gas prices have been relatively restrained in the U.S. this year. In fact, it would seem there is a glut of natural gas out there with more coming online as Middle East and Asian operations come online.

The reason? No it is not market manipulation from Exxon (XOM), BP (BP) or Chevron (CVX) or other oil majors, it is Economics 101. Supplies of refined products have become historically tight, due to economic growth in developing countries like China and India. Any extra capacity that existed in the system when heating oil sold for $.90 cents a gallon has been absorbed and in fact several studies have shown it may be at equilibrium meaning supply and demand are equal. The problem here is that supply cannot be increased at the same rate demand is and that means that price have to go up.

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