August 14, 2008

Heating Oil Lock

Similar to many New Englanders, one of the largest monthly expenses we have during the winter is related to heating our home. We moved into our new home during the Spring of last year. Shortly after (around this time last year) we called around to a couple heating oil companies and locked in at a rate of $2.47 / gallon. Over the course of the year, we used about 1,200 gallons in total, a majority of which was used in the December - March time frame to heat the house. Total 2007/2008 season heating costs, about $3,000.

Fast forward to this year, prior to coming off the highs a couple weeks ago, heating oil at the retail level was actually selling for over $5 / gallon, or a 100% increase year over year. Heating oil is now selling for about $3.50 / gallon. You can see the chart of heating oil below and the steep sell off (NOTE: this chart if for heating oil futures, not heating oil at the retail level).

So what are the options?

  • Lock In - heating oil prices have fallen significantly over the past month. Historically, late summer is one of the best times to lock in your price for the upcoming year. The problem is that most oil dealers are refusing to lock prices this year due to the volatility of heating oil. If you can find one, this may be your best option. You'll know your price and not have to worry if prices start to rise again.
  • Hedge - this option would have not have been available to most Americans a few years ago. Thanks to the Heating Oil ETF (ticker symbol UHN), anyone with a brokerage account can hedge their own heating oil. UHN is designed to track heating oil futures (which in turn set the price of heating oil at the retail level). If heating oil increases, the UHN ETF will increase. If heating oil decreases, the UHN ETF will decrease. Using a simple example (hedging using UHN can become complex due to tax issues, etc.) let's say you want to lock in the price of heating oil today. You call your local heating oil company and they quote you a price of $3.50 / gallon. You ask if you can lock in that price for the next year and they say "sorry, that is today's price only". Now you have to hedge on your own. Based on this price, you know you will spend about $4,200 on heating oil over the next 12 months (1200 gallons times $3.50). You can hedge this cost by going out an purchasing $4,200 worth of UHN. UHN is currently trading at about $50 / share so you would need to purchase 84 shares. Once this is completed, you should be hedged. If retail heating oil increases you will need to pay more, but you have also made money on your ETF purchase which should offset the increase. The opposite is true if retail heating oil decreases. It is important to note that if this strategy is implemented, you are locked in. Any fall in oil prices will not benefit you. And remember, you need to sell the ETF at the same time you purchase home heating oil.
  • Assistance - this will vary state by state. In the Northeast, the states are setting aside significant amounts of funds to assist those who qualify with heating costs. If you think you qualify, this may be a good option to reduce the total amount you need to pay.
  • Gamble - are you feeling lucky? If you are, you may choose to do nothing and hope that oil prices continue to fall.

As for me, I am still debating the options. As you can see on the chart above, heating oil currently sits right on the 200 day moving average. If it continues lower, there could be another significant round of selling. I'm not a trader, but I will continue to watch this over the next couple of days.

I have personally budgeted for $4 / gallon oil which means I am accruing approximately $400 / month for the cost. Any price below that would be upside versus my expectations.