Heating Oil is Not Burlap

Burlap was once the go-to packaging for other commodities, like cotton bales, seed, flour, and grains. Burlap was itself vigorously traded as a commodity on commodities exchanges alongside copper, rubber, and petroleum products like home heating oil. Futures trading in burlap was commonplace. Today, burlap is part of a mix of low-value commodities alongside tallow, hides, and lead scrap. Home heating oil, though, is still a highly valued commodity in the 21st century. So why are you buying it the same way 19th century traders bought burlap?

The wise folks at Investopedia tell us home heating oil, derived from crude oil, is tied to the price for West Texas Intermediate (WTI) crude oil. Because home heating oil and crude oil are commodities, their supply and demand (and prices) fluctuate daily.

Traders stand in trading pits and shout out their asking price, listening for buyers and their counter-offers until deals are struck. The process is a bit rough, but it has worked for decades to set prices for many things you buy. Prices for home heating oil rise and fall in reaction to the much larger WTI commodity market.

As Investopedia points out, other price drivers affect home heating oil prices:

• Cold weather — Home heating oil is largely a northeastern consumer item
• Refining costs — Most refineries are in the south; one hurricane can wreak havoc on prices
• Prices of alternative heating fuels — Natural gas, geothermal, solar, and even coal and wood affect home heating oil prices
• Reduced demand due to increased energy efficiency and better-insulated homes
• Government regulations or easing of regulations

Since WTI fluctuates wildly across seasons and years, “locking in” a home heating oil price is difficult. WTI pricing over the years (thanks to Statista) shows enormous fluctuations, from 1976's $12.23 a barrel  to 2008's $99.06, with 2017 prices hovering around $50.88.

When you sign a home heating oil contract that specifies a price per gallon, the oil company offering the price is not usually basing it on spot pricing (today’s quotes). It is basing it on historic numbers — last year’s prices — hedged slightly in the company's favor. You cannot fault the company; it would not long be in business if it undervalued its commodity and lost money on every customer.

With that home heating oil contract using old prices, that does not mean you are actually getting last year’s oil. Your fuel oil company is not stockpiling millions of gallons and slowly selling it off. Like any commodity, home heating oil has a shelf life, so it goes out to customers nearly as rapidly as it arrives at your local company.

Your local company is buying the fuel oil very much in accord with daily pricing, so one day it may cost them $2.05/gallon and the next day, $2.10. If your local company is smart, its buyers pool their purchasing power with other local fuel oil companies to buy larger orders and get a better buy.

What if, though, you could exert that same kind of fast buying power, responding to market conditions and pooling your need for home heating oil with neighbors? Instead of buying oil at last year’s price, or locking in to a mythical price-per-gallon, what if you could buy it on the “spot market,” locally?

When you use the power of modern technology through Slick, you become that trader in the pit (without any shouting). You and your neighbors virtually pool your financial resources to ask around for the best deal, to be provided by local oil companies.

Local home heating oil companies vie against each other to offer you the best price, not based on a contract, but based on current supply and demand. Suddenly you, the end-user, have as much power in the market as all the other players. And that should give you a warm and fuzzy feeling all over.