Price Protection Programs for 2022 - 2023 Heating Season
Jun 21, 2022
For over 25 years, Hart & Iliff has offered a winter price protection program for our heating oil customers. Initially, we offered both a fixed price and a capped price program. In the last few years, we transitioned away from a fixed price, because it offers no downside protection, if the price drops. Even though it’s been clearly disclosed, each time prices drop during the winter, customers are extremely unhappy about being locked in at a higher price. For example, during the 2014/2015 heating season prices dropped $1.40 per gallon during the winter. This could easily happen again this winter.
For over 25 years, Hart & Iliff has offered a winter price protection program for our heating oil customers. Initially, we offered both a fixed price and a capped price program. In the last few years, we transitioned away from a fixed price, because it offers no downside protection, if the price drops. Even though it’s been clearly disclosed, each time prices drop during the winter, customers are extremely unhappy about being locked in at a higher price. For example, during the 2014/2015 heating season prices dropped $1.40 per gallon during the winter. This could easily happen again this winter.
The other program is a capped price. This program allows you to pay our regular posted price, but never above a price cap. During the 2021/2022 heating season the price cap was $3.299. As a result of significant price increases caused by shortages and the war in Ukraine, the people who participated in this program did very well.
In order to offer a capped price, we need to buy what are known as “call options” on the New York Mercantile Futures Exchange. These options give us the right to buy oil at a particular price, which establishes the cap. In recent years, the premiums for these call options have been approximately 20 cents per gallon. The recent increase in petroleum prices, has greatly increased price volatility. As volatility increases, so do option premiums. We just obtained a quote of 64 cents per gallon for call options for to the 2022/2023 heating season. That’s more than three times the amount we paid last year. At that rate, we don’t believe it makes sense to offer the program. We will continue to monitor conditions in the petroleum markets to see if premiums decline enough, for it to make sense to offer a capped price program, for 2022-2023.
The bottom line is, a fixed price makes no sense because there is no downside protection and a capped price makes no sense when the premium is 64 cents per gallon. If we wouldn’t sell a fixed or a capped price program to our mother, we won’t sell it to you, our valued customers. Please call us with any questions or concerns. At Hart & Iliff your comfort is our business.
