April 09, 2018
Did you know that every time you order your heating oil, be it online or on the telephone, you could be influencing the global price of oil?
The latest Rix Petroleum oil market report examines how you, the heating oil customer, could be affecting the global price of oil. Okay, so as an individual customer you’re not likely to change it by much, but it all adds up!
That’s because the demand for heating oil has a direct effect on the price of crude oil. It’s basic economics, really; supply and demand. When demand goes up, refineries can afford to charge a premium on crude, subsequently increasing the price at which heating oil suppliers can purchase oil prior to reselling for domestic consumption.
Consider this winter, for example. The 2017/18 winter has been one of the coldest and longest for years. This is not just in the UK but across the entire Northern Hemisphere and as a result, the volume of heating sold has significantly increased. Indeed, experts predict that the global uplift in heating oil consumption over this winter will be in the order of 5 percent.
But did you know that from a refinery perspective, heating oil used in the UK and Japan is kerosene, yet in the rest of the world it is a different grade known as gas oil? Gas oil is effectively the same fuel as road diesel, the stuff most people use to power their cars. Therefore, an uplift in heating oil production naturally leads to pressure on road diesel production which can, yes, you’ve guessed it, push up the price.
But of course, it doesn’t stop there. Although the price increase is felt most apparently by diesel car owners, the effect trickles down to be felt by all, whether or not you use heating oil or drive a diesel vehicle. The fact is that most consumables are transported using diesel-powered transport and so the cost of distribution goes up, which all adds to inflation.
The good news is, however, that this winter aside, recent winters in the UK have been mild. The last really cold winter we had was 2011/12 when the average temperature in Sheffield (used because it is approximately the centre of the country) between November and March was 3.98 degrees Celsius. However, over the following four years the temperature for the same period was an average of almost three degrees higher, and in 2015/16 not a single sub-zero temperature was recorded between November and March. This had the effect of easing pressure on diesel production and reducing price inflation. It will have certainly played a role in the low price of crude which has predominated in recent years.
Of course, global heating oil consumption, and therefore price, isn’t determined by the weather alone. There are many factors which influence it and to discuss them all is beyond the scope of a single blog post. But one of the biggest aspects is global usage. As with most carbon-based fuels, there is a trend towards less and less heating oil use, and this can be observed on a worldwide scale.
In America for example, 5.7m homes are heated by oil. However, this is 3m less than a decade ago. Japan still consumes a significant volume of 14bn litres per annum, but this is 50 percent less than 10 years ago. The same trend can be observed in a number of countries across the world.
Reasons for the decline are numerous and include environmental legislation, more efficient boilers, replacing old housing stock with modern homes that employ alternative types of power, and a general drive to be less reliant on carbon technologies.
All this means that in future, purchasing heating oil might have less of an influence on the global price of oil. But this is not likely to be by much. Even if fewer volumes are being sold, heating oil sales still sit at around 70bn litres per annum, and that’s before the 2017/18 winter figures come out. Therefore, the product you stock your tank with, that keeps you warm on those chilly winter nights, still has a lot of influence on the international markets and will do for many years to come.
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