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Why are Heating Oil Prices Falling?

March 17, 2014 | Market Watch: Price Trends

We’ve seen a 20 month low on heating oil prices in the last week, despite the fact there is turmoil in Ukraine that could affect Russian oil supplies to the rest of Europe. So what is going on? Why have heating oil prices continued to tumble?

 

Mild Winters Keep Heating Oil Prices Low

One of the biggest reasons heating oil prices in the UK haven’t seen their usual seasonal climb has been due to the unseasonably warm weather we have experienced over the last few months. Despite the fact we had one of the wettest winters on record, the temperatures were above normal meaning people just didn’t burn through as much oil as you would normally expect. As a result, demand has been lower this winter than previous winters and we all know the basic rules of supply and demand!

The situation in the US this winter has been somewhat different with very cold weather driving up heating oil prices there. However, the cold weather has now abated in the US so this is also reducing US demand.

 

US Oil Production has Increased

Now that the US is moving ahead at a rapid pace with fracking, they are ramping up shale oil production. As a result, the US is reducing the demand for world oil supplies because they have less need to import oil. Result: more oil for the rest of us and, as before, the laws of supply and demand come into play. Lower demand equals lower prices.

It’s not just the US either. Countries such as Canada are also upping production meaning there is more oil available in the market.

 

US Economic Policy

The Federal Reserve has now started to taper off its quantitive easing programme in the US. Whilst this is a very gentle taper, any signal that indicates the US dollar will strengthen will cause oil prices to fall. So, most of the forecasts for oil prices in 2014, including those of the International Energy Agency, are that they will fall and could be lower than in 2013.

 

China

Recent economic data from China has indicated that their economy may be slowing. This will also have the potential to reduce oil prices as China is now believed to be the largest importer of oil in the world.

 

Iranian Oil Supply

The thawing of relations between the US and Iran which started with talks towards the end of  2013 could well lead to Iranian oil supplies coming back on-line in 2014 thus offering the world another source of crude oil. Again, this will help to ease any supply concerns in the global oil markets. Whilst this hasn’t yet happened, commodity markets will be factoring this into to oil futures.

 

Will Heating Oil Prices Remain Low?

The simplest answer to this question is that, as we approach the summer months heating oil prices traditionally drop as demand falls. However, there are many factors that could drive up prices including the situation in Ukraine, unrest in Venezuela (the world’s fifth largest oil exporting country) and increasing turmoil in Libya which could lead to a civil war.  We did see a minor spike in prices in late August last summer when the situation in Syria looked as if it may result in US military action. The same could well happen over the coming months if any of these potential conflicts erupt.

Add to this the more positive outlook for world economies in general and this could also drive up heating oil prices in the coming months.

 

 

For more information on oil prices

Keep up to date with heating oil prices trends: BoilerJuice heating oil price chart

Houston Chronical reports on the impact of fracking on oil prices: http://www.chron.com/opinion/outlook/article/Steffy-As-we-debate-fracking-look-at-its-world-5318537.php

Arab News reports on oil prices following weak China trade figures : http://www.arabnews.com/news/537951

Week ahead: A Fed decision on more tapering – Fox Business: http://www.foxbusiness.com/economy-policy/2014/03/14/week-ahead-fed-decision-on-more-tapering/

 

 

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