Over the last few months heating oil prices have not been behaving as we would normally expect. Just comparing average UK prices in the first few months of this year with the same period last year reveals a completely different pattern. Not only that, we have seen average prices at levels not seen since 2010. What has caused this and why, despite relatively stable crude oil prices, are heating oil prices continuing to fall?
Crude Oil Prices
As we have said in many previous blogs, heating oil prices are largely affected by the price of crude oil from which it is refined. The price of crude oil is in turn affected by a multitude of factors ranging from currency fluctuations, supply and production problems, and unrest in oil producing countries to name a few. Despite unrest in Ukraine and worries about Russia cutting energy supplies to Europe which could have sent prices rocketing, a strengthening pound which typically reduces the price of crude oil in the UK and continuing issues with supply in Libya, again likely to drive oil prices higher, the price of Brent crude since January has remained relatively stable at around $108/barrel. Unusually, given the stable price of crude, this means the current continuing decline in heating oil prices can’t be attributed to the crude oil price.
The Influence of Weather on Heating Oil Prices
This leaves the weather as the other main factor influencing the current decline in heating oil prices. Probably the most significant difference between the first five months of 2014 and the previous year has been the weather. As you may recall, the winter of 2012/2013 the cold weather went on well into Spring with snow falling as late as mid-April. This had a big impact on heating oil prices as demand for heating oil was much higher. You can see from the chart that as soon as this cold snap ended, prices dropped dramtically from a high of 65.73ppl on 10th April 2013 to 56.26ppl on 6th May 2013. This year we haven’t seen any significant spike in prices in either direction because we had an exceptionally mild winter. Heating oil consumption was much lower and, as a result,prices have remained low.
This leaves us with the question: Are lower heating oil prices this year just the result of the mild weather or are other factors beginning to impact on the way consumers use heating oil? We do know that over the last few years everyone has been feeling the pinch with the cost of living outstripping any salary increases by a significant margin. We also know from data that electricity prices have risen by over 30% since 2010. Given this is the other main source of energy for heating oil users, this may well be having an impact. It is unlikely however that in the space of a year, heating oil users would significantly reduce their consumption over and above a natural reduction caused by a mild winter. The Office for National Statistics reported last year that between 2005 and 2011 households have reduced their consumtption of gas and electricity by 24.7% showing householders have been taking steps to reduce energy consumption for quite some time and there is no reason to believe heating oil users would have been doing anything different.
We can never be entirely sure what causes such anomalies in data but we can be fairly certain that this years dramatic drops can be largely attributed to the weather. Thinking back over the last few winters, they have on the whole, been cold with heavy snowfall and below average temperatures. This year was very different so we can expect that should we see another cold winter in 2014/2015, prices will once again go back to their usual pattern. Of course, we won’t know until next winter. All we can say is, in the meantime, take advantage of the low prices and fill your boots!
Tell Us What You Think
Let us know what you think about current heating oil prices? Have you taken advantage and filled up? Have you taken steps to reduce your consumption and, if so, what have you done?
To keep an eye on heating oil prices check our heating oil price charts