What Direction Will Heating Oil Prices Go?

Posted by Oilism.com on September 5th, 2010 at 02:38pm

What Direction Will Heating Oil Prices Go?

As a refined product of crude oil, heating oil prices reflect both shifts in the overall oil market as well as the specific shifts in demand for home heating. These related variables result in rapid shifts in heating oil prices, which can impair many low income families during times of difficulty.  This winter, increased demand for home heating is anticipated to increase the price of heating oil, especially as overall demand for crude oil increases in developing nations. The falling value of the dollar is putting increased pressure on heating oil prices, resulting in shifts that create uncertainty for home owners headed into the winter season.

Short term trends suggest that home heating oil prices will increase this winter based upon limited supplies and increasing international demand. There are seasonal shifts in the heating oil market, and a sharp increase in winter demand results in marked increases in overall prices.

Heating oil requires extensive refining, requiring that oil be processed domestically or imported from abroad. The primary sources of fuel oil are from Central America or Canada, and limited supply can lead to sharp spikes in short run oil prices. The seasonal shifts result in sharp increases in prices when refining capacity is limited, which occurs in a wide variety of cases. Producers allocate a finite set of crude production for home heating based upon estimated demand although unexpected winter weather patterns can result in rapid shifts in the overall oil equation, which can shift oil prices upwards rapidly.

The primary determinant of heating oil prices is the seasonal refining capacity, and recent trends suggest that heating oil demand rapidly outpaces supply, resulting in sharp increases in heating oil prices.  Analysts anticipate a cold winter season this year, which can result in a rapid increase in heating oil demand, driving up prices to near highs. While the possibility of a mild winter still remains, the limited refining supply increases the probability of an imbalance.

Under Oil price