Oil prices plunged today, moving in the opposite direction intended by OPEC when it announced a new production cut of 2.2 barrels per day, effective January 1st.  Although the cut was the largest ever implemented by the cartel, and slightly deeper than the 2 million bpd cut analysts expected, the market at large viewed the cut as not substantial enough to compensate for serious reductions in demand that have been seen in recent months.  From CNBC.com:

“It seems like, despite the fact that the economies of producer nations are clearly in trouble, they don’t have the temerity to actually go ahead and do the kind of cut that would be really interesting to traders to turn this around,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

At the 2:30 pm NYMEX close, crude oil had lost 8% to settle at $40.06 a barrel and heating oil had lost about 1%.

New stockpile data released today by the EIA showed increases in crude and refined oil products as a result of continually-falling demand also contributed to falling oil prices.

HEAT USA price experts were pleasantly surprised by the drop in oil prices, and predicted a slight reduction in retail prices tomorrow.

HEAT USA Price Report
Evening projection (for Thursday’s average retail heating oil price per gallon): DOWN $0.015 to $0.02

On December 2nd, The HEAT Zone posted a report on the Suffolk County Legislature’s presiding officer, William Lindsay, and the pair of bills he introduced that would regulate contracts between heating oil retailers and their customers.

According to the Southampton Town News, one of the two bills was approved by the Legislature yesterday by a vote of 13-2. The bill will now be presented to County Executive Steve Levy for approval.

The article does not specify the content of the bill in question, but Lindsay’s calling it “…a very simple bill: you have the right to look at the fine print,” hints that it is the bill intended to require all heating oil contracts to be put in writing.

This September, homeowners and public officials who had signed contracts for locked-in heating oil prices during the price spike began to feel the sting of buyer’s remorse. Prices continued to fall in October, and are currently at the lowest levels of the year. People in locked-in contracts are unable to take advantage of the historically-low prices, and are frustrated. How did this happen? If a heating oil consumer is currently in a locked-in price contract, what can he or she do about it?

Understandably, many heating oil customers were alarmed by soaring prices in July, when crude oil hit its peak price of $147 a barrel. They wanted to protect themselves from from a seemingly endless escalation of prices, and turned to locked-in price contracts as a solution. Locked-in contracts are essentially a gamble–a bet that heating oil prices will move higher over the time period covered by the contract. This gamble can be risky, mostly because “there are too many variables at play,” as an article on 27east.com explained. Accurate predictions of the movements heating oil prices, or any commodity for that matter, are effectively impossible.

Although some people are blaming heating oil retailers for now-unfavorable locked-in contracts, the truth is that when heating oil companies enter into a contract with a customer, they make the same contract with their wholesale heating oil provider. In fact, as ConnPost.com reported on December 3rd, Connecticut state law requires that retailers purchase wholesale oil immediately after a customer signs a locked-in contract, ensuring that the retailer will have enough oil to cover that contract during the heating season. When customers locked in high retail prices over the summer, retailers locked in high wholesale prices. While it may seem like heating oil retailers are reaping big profits from their customers’ high priced locked-in contracts, they cause the dealer to suffer in the same way the customer does. TimesUnion.com reported on December 3rd on one dealer who strongly discouraged his customers from signing price-lock contracts. Of the customers who demanded he lock in their prices, he said, some of them have now called to ask him to release them from the contract.

So if a person has signed a contract that obliges him or her to pay a locked-in price that is higher than the current market price, is there a way out? The answer is yes–but for a price. Contracts, if drafted correctly and put in writing, are legally-binding for both parties involved–neither side can decide to nullify or amend the contract because prices have changed. Most contracts, however, do include an escape clause that involves the customer paying a fee of $500 or more to get out of it. It is a hefty price to pay, but is really the only option. Some smaller dealers have already been put out of business by locked-in contracts this season, as too many of their customers have opted to pay the fee and cancel their contracts. In most cases, the cancellation fee does not cover the wholesale cost of the oil that the retailer purchased when the contract was signed, leaving him with an obligation to buy wholesale oil that he can’t sell and therefore can’t pay for.

The best course of action for customers locked in at high prices is to first examine their written contract to make sure it is complete with the lock-in price, delivery methods, and the cancellation fee. If consumers think their contracts are incomplete or inaccurate, they should contact their State Attorney General’s office. Assuming the contract is complete and legal, the customer should, as Connecticut Attorney General Richard Blumenthal advised in the ConnPost.com article: “calculate how much product they used heating their homes last year, multiply that by the difference in the current market rate versus the contracted rate, then calculate whether that amount exceeds the potential contractual penalty.”

The unpredictability of heating oil prices is the main reason why HEAT USA only offers automatic delivery contracts at a discounted price that is tied to the daily price of heating oil. HEAT USA President Andrew Heaney commented on this year’s high priced lock-in contracts, and encouraged conservation as a sure-fire way to save money when he was interviewed by BusinessWeek T.V. in late October.

Customers who desire to cancel their price-lock contracts should contact HEAT USA at 1-888-HEAT-USA (1-888-432-8872). An Outreach representative can provide assistance in calculating whether or not it is to each customer’s advantage to pay his or her contract’s cancellation fee.

For more news coverage of this topic, visit:
Courant.com
Newsday.com
LoHud.com

OPEC announced a 2.2 million barrel per day (bpd) production cut from current levels, a 4.2 million bpd reduction from September levels.  The U.S. Energy Information Administration released its latest stockpile numbers just moments before the OPEC announcement, showing  a 500,000 barrel increase in U.S. crude oil stocks last week, which helped to hold down crude prices on NYMEX.  The price for a barrel of crude stood at $43.55 at 10:59 am eastern time (just 0.1% lower than its opening price) and showed was on the rise, presumably on the news of the OPEC cut.

The EIA data also showed a 5.5% decrease in residential fuel oil (heating oil) stocks last week, balancing out a 2.2% increase in distillate fuel stocks.

HEAT USA Price Report
Morning projection (for Thursday’s average price per gallon): UP $0.02

Crude and heating oil prices fluctuated this morning and were near their opening prices as of 10:03 am eastern time; crude oil had risen half a percent to $43.62 a barrel, and heating oil had gained almost three percent.

Saudi Arabia’s oil minister Ali Naimi set expectations on Wednesday of a 2 million barrel per day production cut to be agreed upon at the OPEC meeting today.  While that would be the largest single production cut in the cartel’s history, many analysts see it as inadequate to push up oil prices.  From Bloomberg.com:

“I think 1.5 million to 2 million is needed just to stabilize the market,” said Robert Montefusco, a broker at Sucden (U.K.) Ltd. in London. “Demand is falling away quite rapidly. They will probably need more if they want prices going back up to $50 and higher.”

The oil market is also waiting for the announcement of the EIA’s weekly oil inventory data.  Predictions of the stockpile data vary, but most include an increase in crude supplies, which would help drive down oil’s market price.

HEAT USA price experts confirmed a one penny increase over yesterday’s retail prices this morning, and stated that results of the OPEC meeting and official EIA stockpile data were needed to project tomorrow’s prices.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.01
Morning projection (for Thursday’s average retail price per gallon): TBD

After climbing steadily this morning, crude and heating oil prices fell to close down 3% and up a fraction of a percent, respectively.  The Federal Reserve reduced the federal funds interest rate to a range of 0% to 0.25%, strengthening the dollar and making oil a less attractive buy.

With the OPEC meeting just hours away, Saudi Arabian oil minister Ali Naimi’s announcement that OPEC plans to cut production by 2 million barrels per day tomorrow was met with some disappointment, as analysts believed the reduction would not be enough to catch up to rapidly-falling demand.  Earlier news that Russia would cut production in coordination with the cartel appears to have lost influence, as a New York Times article explained:

But Russia’s proposal is unlikely to have a big effect on the market. Some analysts see the move as simply window-dressing — Russian production will drop anyway this year, they say, because of the government’s own restrictive policies, inadequate investments and hefty export taxes.

As has often been the case in the last three months, negative economic news and a bleak outlook for recovery of the global economy managed to overshadow statements or events that might lift the price of oil.

HEAT USA price experts predicted a small increase in retail heating oil prices tomorrow.

HEAT USA Price Report
Evening projection (for Wednesday’s average retail heating oil price per gallon): UP $0.01

Image: The New York Times

Low oil prices have been a welcome relief for heating oil and gasoline users around the country–fuel prices that were at or near record highs as recently as six months ago are now 25 to 50 percent lower.  Even better, it appears as though low oil and energy prices will remain low for at least the next year or so.  Amidst all the good news, however, there is a downside.

When the global economy does recover from the current recession (which could be in six months or five years–but it will definitely happen), the oil industry will be hard-pressed to meet surging demand.  The seeds of that supply crunch are being sown right now, as the fastest-ever decline of crude prices is forcing oil companies around the world to shut down and delay expansion of oil production.  Exploration and production costs are as high as ever, so when crude prices fell hard, oil companies were suddenly faced with operating at a loss, and, being for-profit businesses, the companies balanced their operations by shutting down production.    Even Saudi Arabia, the world’s largest oil producer and the nation who can produce oil most cheaply (in a recent 60 Minutes interview, King Abdullah of Saudi Arabia said it costs the kingdom less than $2 to produce one barrel of oil–click the link to see the video and fast forward to the 8:30 mark in Part 1), has postponed the construction of new refineries.  Peter Jackson, an analyst at Cambridge Energy Research, has said that if the current trend continues, world fuel supplies could fall by five percent over the next five years.  North American extraction facilities and refineries are also putting on the brakes;  a front-page article in the New York Times reported today that brokerage firm Raymond James has found that domestic drilling in the U.S. could decline by 41 percent next year as oil companies scale back.  Obviously, such a development could put a major dent in plans to reduce U.S. dependence on foreign oil.  An analyst at Bernstein Research went even farther, predicting that a 17 percent reduction in North American oil production through 2010 “will be the catalyst needed for oil prices to rebound,” according to the Times article.  In that scenario, reduced production by the world’s largest oil consumer and its neighbors will tip the balance and drive production levels below demand levels and spark a sharp price increase.

If current production cuts continue through next year, a price spike appears to be almost inevitable, however it starts.  Oil extraction and refinement are complex and expensive processes, and it takes weeks for a dormant oil well or refinery to return to full capacity.  When the global economy recovers, oil demand will surge well beyond production capacity, and the price of oil will spike, perhaps closer to the $200 per barrel mark than the $150 mark seen this summer.

So remember, enjoy low heating oil and gasoline prices while they last and plan for an uncertain future–low prices may not be around for too much longer.

Heating oil wholesalesrs reacted quickly to this morning’s market increases in oil prices, spurring a moderate increase in retail heating oil prices as of 11:00 am eastern time.

HEAT USA Price Report

MIDDAY PRICE CHANGE: UP $0.06

As representatives of OPEC member nations arrived in Oman, Algeria for tomorrow’s meeting, oil prices rose steadily, showing strong expectations of a production cut that could be the biggest in the cartel’s history.  The price for a barrel of crude had risen about 2.5% to $45.66 and the price of heating oil had increased by 4% as of 9:57 am eastern time this morning.

Statements by Venezuelan oil minister Rafael Ramirez led many analysts to predict a production cut of 2 million barrels per day or more to come out of the meeting–a focused attempt by the group to halt the plunge of oil prices.  Russia, the world’s largest non-OPEC oil producer, plans to cut production in coordination with the group, which also helped to support prices on the markets this morning.  “Whatever they do now, presumably more than a 2 million barrels a day cut, is going to help, but what helps the psychology is that Russia has also announced they may join in,” said Johannes Benigni, chief executive officer at consultants JBC Energy GmbH in Vienna, quoted in a Bloomberg.com article.

HEAT USA price experts confirmed that the retail price of heating oil fell 13¢ from yesterday morning’s price spike, opening today at 2¢ below Monday’s opening price.  Focus on the OPEC meeting and the increase in oil prices on NYMEX led them to predict moderate-to-large price increases tomorrow.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.13
Morning projection (for Wednesday’s average price per gallon): UP $0.07

Crude oil closed the day down nearly 4%, settling at $44.51 a barrel, after briefly touching above the $50 mark this afternoon.  Heating oil followed suit, dropping just under 3% after posting large gains this morning.  A drooping stock market reminded investors of major economic problems that have led to significant demand destruction around the world, overshadowing plans by OPEC to cut production by up to 2 million barrels a day at their Wednesday meeting in Algeria.

HEAT USA price experts noted a huge downswing in prices that followed this morning’s price jump, and reported a small net drop in retail prices from Friday to Tuesday.

HEAT USA Price Report
Evening projection (for Tuesday’s average retail price per gallon): DOWN $0.13

Plummeting oil prices could give President-elect Barack Obama the upper hand in any diplomatic engagements with Iran and President Ahmadinejad

An October 29th HEAT Zone post discussed how the collapse of oil prices have had a disproportionately negative effect on oil-dependent, anti-U.S. regimes Iran, Russia, and Venezuela.

Since then, the price of oil has fallen farther (from $66.54 to $45.54 a barrel) and America has chosen a new president.  An Associated Press article published today revisited the topic of how the collapse of oil prices could affect the United States’ relationships with other nations.  In Iran, dropping oil prices have continued to devastate an unstable economy  and has made U.S. economic sanctions even more deeply felt.  Secretary of State Condoleezza Rice stated her hope that the economic turmoil “will lead Iran to take a more reasonable course” in its relations with the United States and other nations it had previously agitated against.  The article also notes that, although lower oil prices mean less funding for governments like Iraq to battle Middle East-based international terrorism, they also mean less financial support and mobility for terrorist groups as well.  Former United Nations Ambassador Thomas Pickering also noted that the fall of oil prices and the global recession affords incoming president Barack Obama a unique opportunity to reestablish America as a world leader by leading the world out of the recession.

A Los Angeles Times opinion piece by academic and Iran expert Hossein Askari focuses on Obama’s policy toward the problematic nation and urges him to embrace diplomacy, but only after slumping oil prices have sufficiently reduced the clout of its anti-American regime.  He explains that sanctions implemented in 2007 and strengthened last month have succeeded in economically isolating Iran, and that falling oil prices have made the sanctions all that more powerful.  Askari classified Iran as not economically or militarily powerful enough to pose an immediate threat to the U.S. or Israel, allowing Obama to take his time and let falling oil prices take their full toll on the nation’s government until economic hardships force them to reach out to an Obama administration.

Whatever path Obama chooses to take with Iran when he becomes president, it will almost certainly be hugely affected by falling oil prices and the toll they continue to take on the Iranian economy.

With OPEC’s next official meeting in Algeria only two days away, focus on the cartel has intensified.  Recent statements by OPEC member nations’ oil ministers have given clear indications that another production cut is on its way.  The imminent production cut of up to 2 million barrels per day made for an optimistic market this morning that saw the price of crude jump 6% to $49.26 a barrel as of 9:23 am eastern time.  Heating oil also gained 6%.

HEAT USA price experts noted that the steep price increase this morning set the pattern for continuing gains throughout the day.  They reported that retail prices had already reacted to this morning’s market news, climbing over ten cents a gallon.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.115
Morning projection (for Tuesday’s average price per gallon): UP $0.04

Crude and heating oil rose late in the day to pare earlier losses and close just slightly beflow their opening prices. Crude oil, which briefly touched below the $44 mark today, recovered in the afternoon, closing 3% from its opening position at $46.28 a barrel. Heating oil, which was down by almost 5% earlier today, closed at less than 1% below its opening price.

The state of the “big three” U.S. auto makers continued to dominate the markets today, with a bailout bill’s failure in the senate driving prices down this morning. This afternoon, the announcement by President Bush’s Treasury Department that it would intervene to prevent the collapse of the auto manufacturers if necessary lifted stock and commodities markets across the board.

Friday capped an extremely volatile week for stocks and commodities, leading oil analyst Stephen Schork to comment, “This is a market that is trading on any headline out there,” in an Associated Press article.

HEAT USA Price Experts noted that heating oil closed near its opening price and therefore announced no change in Monday’s retail prices.

HEAT USA Price Report
Evening projection (for Monday’s average retail heating oil price per gallon): NO CHANGE

HEAT USA and The HEAT Zone are now on twitter. Get the latest updates on heating oil in the Northeast directly to your Twitter account on your computer or mobile device. Go to twitter.com to sign up, search the HEAT USA twitter user name “heatingoil,” click the user name, and click “follow.” The HEAT Zone will update several times a day with price info, heating oil news, and links to the latest blogs. When you use twitter, to follow HEAT USA and The HEAT Zone you’ll be the first to know!

The $15 billion bailout bill that passed the House late Wednesday died in the Senate yesterday, following heavy partisan opposition that included a Republican filibuster. The failure of the bill was met with widespread market pessimism that touched Asian stock markets as well as U.S. stocks and crude and heating oil prices. Crude had fallen almost 7% to $44.71 a barrel and heating oil was down about 4% minutes before the opening of the New York Mercantile Exchange at 9 am eastern time.

Goldman Sachs weighed in on the future of oil prices, reducing its estimate to an average 2009 price of $45 a barrel, saying, “The collapse in world oil demand in the fourth quarter of 2008 as the global credit crunch intensified, now threatens to push oil prices below $40 a barrel in the near term.” (from CNBC.com)

Although OPEC is still expected to make a large cut in production levels (up to 2 million barrels a day) at its meeting next Wednesday, the auto bailout failure and the global recession appeared to dominate the market mood this morning.

HEAT USA price experts confirmed yesterday’s small end-of-day increase, but pointed out that the mid-morning increase made for an overall price jump of $0.11 from Thursday morning to today.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.02
Morning projection (for Monday’s average price per gallon): DOWN $0.04

Russian president Dmitry Medvedev, speaking on Russian state television today, confirmed expectations that his country would reduce oil output in coordination with OPEC at the cartel’s meeting in Algeria next Wednesday. “I would like to say that we are ready to protect ourselves as this is our base income, oil and gas,” said Medvedev, quoted by the news agency AFP.

OPEC and Russia, the world’s second-largest oil producer after Saudi Arabia, have been courting each other heavily as the price of oil has plummeted in recent weeks, with spokespersons on both sides expressing an interest in cooperation. In his remarks, Medvedev also mentioned the possibility of Russia seeking membership in OPEC.

The announcement topped off a very strong trading for oil day that included anticipation of a major OPEC production cut and predictions of demand recovery in 2009 announced by the IEA. Crude oil gained over 10% to settle at $47.98 a barrel. Heating oil rose by about 6%.

HEAT USA price experts expect a smaller price increase tomorrow, as the market price of heating oil continued to rise after today’s mid-morning price increase.

HEAT USA Price Report
Evening projection (for Friday’s average retail heating oil price per gallon): UP $0.03

Image: washingtonpost.com

The latest chapter in the saga of the still-unfolding American economic downturn is the bailout (or non-bailout) of the “big three” auto manufacturers: Ford, Chrysler, and General Motors. Two of the three (Chrysler and GM) have indicated that they require loans or other financial assistance by the end of 2008 to avoid complete economic collapse. Ford has said it also needs economic help, though its collapse is less imminent.

Late last night, the House of Representatives passed a bill on a 237 to 170 vote that could be seen as the first step toward a full-scale bailout, approving a “stop-gap” loan of $15 billion to the two more-troubled companies that would ensure their survival through March of 2009. Although the bill still faces tough Republican opposition in the Senate, “the market knows that [the bailout] is going to happen in one shape or another,” said Peter Cardillo, chief market economist at Avalon Partners, quoted on MarketWatch.com. The news of the bill’s passage helped to boost the price of crude on NYMEX today, according to CNNMoney.com, primarily because the failure of the big three would deal a huge blow to the already-floundering U.S. economy. Less damage to the economy means a swifter recovery and a quicker return of oil demand, which has recently sunk to its lowest level in decades. Also, a recovering auto industry would directly increase demand for oil in the U.S., as it is a major part of the country’s manufacturing sector–manufacturing requires huge amounts of oil to operate machinery; crude oil is also a key ingredient in plastics and other raw materials, so increased demand will trickle down from the auto industry to other manufacturing sectors as well.

President-elect Obama (who has signaled support for the auto industry bailout) and the economic recovery plan he announced last weekend (covered on the Monday morning’s HEAT Zone post) have also helped to stimulate the economy lately, sending oil prices up along with the stock market on Monday. If Obama successfully implements his plan, stimulating job growth and kick-starting U.S. manufacturing, it could, in combination with a revived auto industry, but the antidote that brings the American economy back to life. Of course, expedient economic recovery would be a positive for all Americans, but it could also bring about a less-popular effect much sooner than anticipated: a return high oil prices.

The House of Representatives’ passage of a $14 billion “stop-gap” loan to troubled U.S. automakers Chrysler and General Motors, as reported by CNNmoney.com, helped to stimulate a spike in crude prices that led to mid-morning increase in the retail price of heating oil. The first step toward what could be a larger bailout package for the “big three” American auto manufacturers combined with news of November production cuts in Saudi Arabia, anticipation of additional OPEC production cuts next week, Russia’s plans to cut production on par with OPEC, and the IEA’s prediction of recovering global oil demand in 2009 to drive crude and heating oil prices up 6.8% and 5.5%, respectively.

HEAT USA price experts expected the price increase to remain intact until the end of the day, and most likely into tomorrow.

HEAT USA Price Report

Average retail heating oil mid-morning price change: UP $0.08

Two pieces of good news sparked a bullish trend in crude and heating oil prices this morning, lifting crude by 7% and heating oil by 5%. Crude surpassed the $45 per barrel mark and rested at $46.60 at 9:55 am eastern time. The International Energy Agency predicted that world oil demand would grow again in 2009, contrasting with yesterday’s forecast by the U.S. Energy Information Administration, which had estimated a decrease of 450,000 barrels per day next year.

Oil prices were also buoyed by oil minister Ali al-Naimi’s announcement of Saudi Arabia’s output numbers for November: 8,493,300 barrels per day. The figure was in line with reduced production goals set in October by OPEC, and was significantly lower than the 9.05 million barrels per day estimated by the IEA. Prices were further supported by persistent expectations of another OPEC production cut to come out of the group’s meeting next week, as well as Russia’s announced plans to match OPEC cuts.

HEAT USA price experts confirmed a slight price decrease this morning coming after yesterday’s midday price hike, and predicted a moderate-to-large increase in tomorrow’s prices to come as a result of today’s news of production cuts and expectations of growing demand next year.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.02
Morning projection (for Friday’s average price per gallon): UP $0.05

In one of the most volatile trading days for oil commodities in recent months, this morning’s inventory data released by the EIA predicted the final performances of crude and heating oil. Crude oil stocks in the U.S. rose less than expected while stockpiles of gasoline and distillates, which include heating oil, increased substantially, defying predictions of slight decreases. The data, coupled with fresh announcements that Saudi Arabia has begun to reduce oil production and exports, drove up crude oil by over 3% to $43.52 a barrel. Heating oil, weighed down by the surprise inventory increases, fell by about 2%.

HEAT USA price experts announced that the midday price increases announced this afternoon had been cut in half by late-day market losses by heating oil on NYMEX, to be reflected in tomorrow’s retail prices.

HEAT USA Price Report
Evening projection (for Thursday’s average retail heating oil price per gallon): DOWN $0.02