By Halliwell, Cat
20/05/2016

Heating Oil prices: What you need to know

Heating oil is an essential resource for many homes in the UK: according to OFTEC, an estimated 1.4 million households are reliant on the fuel to provide their homes with warmth through the winter months and cold snaps. It provides the most reliable and cost-effective fuel solution for those homes not connected to the national grid.

If your home requires heating oil, you will be aware that the price you pay for your oil will differ from delivery to delivery. There are many factors that affect the price of oil, causing the ever-shifting price of the product for homeowners. In this guide, we will take a closer look at what these factors are and what you should consider if you want to benefit from the best prices.

What affects the price of heating oil?

Home heating oil prices will rise and fall through the year, as the market is affected by many global, national, and local factors which can have a direct effect.

Global crude oil prices

The price that oil suppliers set is influenced by the global price of crude oil, which is determined by the buyers who are responsible for purchasing oil futures. An oil futures contract involves a company that produces oil coming to an agreement with a buyer to sell them oil at a certain point in the future. Buyers use these deals to try to protect themselves from rising prices that could take place between the present and the time they need more oil.

The price of these futures are dictated by the outlook of the market, which is the overall attitude of investors towards the direction the market is headed in. The outlook can be positive or negative based on investor behaviour and trade prices. When the sentiment of the market is positive, prices will usually be set to rise and many buyers will go ahead and make deals at the current lower price, increasing the demand for oil. The opposite can happen when the market outlook is negative, and prices can tumble.

Oversupply and undersupply of oil

As with most products, when there is a plentiful supply of oil, prices are more likely to remain low. In recent years, the USA has embarked on widespread shale oil drilling, also known as fracking, which has turned them into the world’s biggest producer of oil.

This free-flowing supply of oil from the USA, as well as the development of the shale oil industry in other countries, has flooded the market, causing oil prices to fall and keep on falling. According to the government’s figures, in January 2013 heating oil was priced at 57.58 pence per litre, whereas the price had fallen to 22.81 pence per litre by January 2016.

The graph below shows the steady decline of typical heating oil prices over the last three years, from January 2013 to December 2015.

While oil refineries and exporters have been losing out, home and business owners have been able to enjoy lower prices than usual for the last few years.

The market demand for oil

There can also be increases and decreases in the demand for heating oil. Generally, in the winter months when temperatures plummet, there is greater need for homes and businesses that rely on heating oil for warmth to resupply, which can lead to a greater demand for suppliers and a higher domestic oil price. Likewise, unexpected cold snaps can also cause people to use up their supply when they were not expecting to, so they may require an emergency refill.

Unforeseen warm weather can have the opposite effect — home and business owners may find that they do not need to heat their properties when they might have anticipated, meaning that their supplies will last longer. For heating oil suppliers, this lack of demand can lead to surpluses and, consequently, lower prices.

Other influencers

Outside of these main influencers on heating oil prices, there are several others. These include:

  • Refining costs: These are the costs incurred by refineries when crude oil is processed to become useable as heating oil. If the cost to undertake this process is higher, then distributors can expect to pay more for the oil. They are then subsequently forced to increase prices for the end user.
  • Conflict in oil-producing areas: If there is conflict in an oil-rich area, it makes the job of exporting the oil a lot more dangerous. The extra risk incurred by exporters causes prices to rise. Conflict can also have a major effect on the amount of oil that can be exported, often reducing the volume that leaves the area significantly, which can cause shortages and increased demand.
  • Exchange rates: Unfavourable exchange rates can raise the prices paid for oil, which can have a knock-on effect for suppliers and customers.
  • Distribution costs: If extra costs are incurred to the supplier when bringing the heating oil into the country or when delivering it to homes, customers may experience a rise in product price. Causes for increased distribution costs can range from poor weather conditions to fuel blockades or strikes.
  • Value-added tax (VAT): VAT paid by distributors and customers can be increased or decreased depending on the economy of the country. For example, VAT was increased from 17.5% to 20% in the UK in 2011 as a result of the financial crisis.

When should I buy my heating oil?

As there are so many factors that could affect the prices of heating oil, it can be very difficult to predict the what the prices of oil will be, especially in a volatile market as it is at the moment. In the past when the market was less unstable, there was usually a dip in prices during the summer months when demand was lower, and a rise during the autumn and winter.

To give you a sense of the annual pattern that heating oil prices have taken since prices began to fall in 2014, the below graph represents an average monthly cost taken from 2014 and 2015. As you can see, there is an almost continual slide in prices, so previous seasonal patterns like the summer dip and the autumn/winter rise have been negated by continuously falling prices.

If we add a comparative set of average typical heating oil prices from 2010 and 2011 onto the graph below, it is possible to see not only the difference in price between the two time periods, but the difference in the seasonal price trends.

The blue line on this chart has a very different shape to the red, with a visible dip in prices during the summer months (June-August) and a peak during the autumn and winter (September-December). In this case, September was probably the time that people began to think about buying their heating oil for the winter, contributing to the rise in price. The rising price during the Spring months can be attributed to the unrest in the Middle-East during early 2011. This wave-like line is indicative of a more predictable stable market, following a falling and rising pattern that had been established in previous years.

While the market is in its current state, it is difficult to offer any general rule to getting the best prices for your heating oil. Many industry experts have predicted that a recovery could take place sooner rather than later, which could return the market to a more traditional price pattern.

Here at Rix Petroleum, we offer a free heating oil quote service that can give you a quick and easy price for your delivery. We recommend that you use this service often to check the price of oil we can offer you — that way, you can be sure that you will not miss out on the best prices.

Buying heating oil during the summer

When the oil market is stable, we recommend to our customers that heating oil prices are usually the lowest during the summer months.

Not only is demand much more likely to be lower in the warmer weather, but you can enjoy the practical benefits that come with ordering in this season. Ordering in the summer will make sure that you are prepared for the potential cold snaps that are commonplace in the autumn and early winter months, lowering the risk of running low or having to order emergency fuel. Ordering in the winter often means that you will have to wait longer for your oil, with more demand and difficult driving conditions often slowing the speed at which suppliers are able to deliver to you.

If you have oil delivered during the warmer weather, it is likely that you will be keeping it stored in your tank until conditions worsen and you need to use it. Heating oil tanks can be valuable targets for thieves due to their remote location and lack of security, and the extended period of time you will be storing oil can increase the risk of theft. Read our heating oil theft prevention guide to find out how you can secure your tank against intruders.

Heating oil prices vs. other household fuels

For the past two years, oil has been the cheapest fuel for heating homes, undercutting gas, electricity, LPG, wood pellets, and coal. Where the pricing for heating oil has always been competitive, the recent falling in prices has now made it the most cost-effective fuel.

The table below contains comparative data for England, Scotland, and Wales from the Energy Saving Trust for the most widely sourced heating fuels used by households. Their data was last updated in March 2016 and is based on figures from the last 12 months.

Fuel type

Average fuel price (pence/kWh)

Standing charge (£/year)

Heating oil

3.58

-

Gas

4.18

87.75

Electricity (standard rate)

13.86

69.04

Electricity (off peak economy 7)

7.21

79.18

LPG

6.66

-

Wood pellets

4.34

-

Coal/solid fuel

3.94

-


Unlike the two other most popular fuels, gas and electricity, users of heating oil have been able to directly benefit from the worldwide price drop, saving hundreds of pounds on their bills. The others have also experienced dips in recent times, but suppliers have failed to pass on the price drop to their customers.

Both the electricity and gas markets have been subject to the oversupply, mild winter temperatures, and lower global commodity prices that have seen the cost of energy on the wholesale market, as determined by the ICIS Power Index, fall to £36.76 per megawatt hour.

Taking gas as an example, while the wholesale price tumbled by 34% in 2015, the biggest reduction that homeowners saw in their bills was 5% made by one leading gas supplier — many other firms did not make a reduction to their prices.

With the money-saving benefits of using heating oil now well established, it is little surprise that some households using LPG and electricity have looked to switch to using oil. With no definite rise in prices forecast for the near future, it would not be surprising to see more and more people looking to take advantage of the UK’s cheapest fuel source.

Making heating oil affordable

At Rix, we realise that many homeowners are unable to order a full tank during the summer, so we are pleased to be able to offer you access to our Monthly Budget Payment Plan so that you can spread the cost over a longer period of time.

You may benefit from organising or joining a community oil-buying group, especially if you live in a rural or remote area. If you would like to find out if a community group is for you, take a look at our guide which takes a look at the pros and cons of these schemes.

 

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