How fluctuations in crude oil prices wreak havoc for heating oil suppliers

Recent geopolitical tensions caused the price of Crude oil to jump around more than an excited spaniel puppy. When this happens, heating oil suppliers have a real headache. They don’t know how to price to consumers, as they can’t predict what their costs are going to be.

Heating oil is derived from Crude oil - an easy link to establish - most petroleum products are. In order to produce heating oil (Kerosene28), you need to start with Crude. Therefore, it’s fair to assume that any changes in the cost of the base stock, will impact the production costs of heating oil.

What many may not realise is how those changes can cause chaos for heating oil suppliers...

Kerosene (heating oil) supply chain

Heating oil suppliers purchase their Kerosene28 wholesale stock (“Platts”) from oil terminals, who in turn purchase from oil producers or refineries.

Like all goods, the price of this stock is determined by the raw materials (as well as shipping). The raw material in this case is Crude oil.

Import

Tankers ship oil from oil producing countries to terminals.

Wholesale

Terminals store and sell Kerosene to fuel suppliers.

Suppliers

Suppliers buy from terminals and store in their depots.

Consumers

Heating oil is delivered to your home by road tanker.

How Crude price movements impact heating oil

The biggest headache for heating oil suppliers when Crude prices are all over the place is they can’t predict how much their product is going to cost them. It’s like selling a loaf of bread before knowing how much the flour costs.

Standard heating oil delivery times don’t help. A 10-day window during turbulent Crude pricing can be the difference between turning a profit and losing vast sums for heating oil suppliers.

1. Current Platts price is 45ppl
2. Supplier sells to customer at 50ppl
3. Crude increases sharply over a weekend
4. Platts rises to 50ppl
5. Supplier buys at 50ppl, exactly what they sold for
6. Supplier loses money on the order (fuel, driver wages compound this)

A supplier could price at one level and then be out of pocket 5-10 days later when buying the oil to deliver to the customer. It doesn’t take an advanced mathematician to figure out that’s bad for business and not at all sustainable.

How heating oil suppliers de-risk

There are a number of ways heating oil suppliers reduce the risk of selling at a loss. These can be achieved at both tactical and strategic levels.

Wet stock storage

Suppliers that have plenty of room at their larger depots often install large storage tanks on-site (wet stock storage). This allows them to bulk-buy vast quantities of oil when prices are more predictable or lower, which they can either sell now or save for a later date.

If they have a large tank that’s half-full and they need to buy when prices are higher, they can take a blended cost of the total volume of oil they're holding. Helping to both control costs and margins, but also offer more competitive prices to customers when others can’t.

Terminal deals

Another way to mitigate (and used in conjunction with wet stock) is negotiating pre-agreed pricing for large volumes of oil directly with terminals. Terminals can offer a favourable price per litre to suppliers if they commit to buying a set volume of oil in the given month, quarter or year. Normally, the higher the volume committed to, the better the discount.

What makes this agreement tricky is if suppliers commit to buying too much, or have nowhere to store the stock, they could end up in a very sticky situation!

Express pricing

For smaller suppliers, wet-stock and committing to buying lots of oil without knowing demand just isn’t feasible. This is where finding a niche with express delivery can be an advantage.

Suppliers within this realm only price and deliver within short timescales, sometimes a maximum of 5 workings days. This gives them enough confidence that wholesale prices won’t radically change and they deliver the oil as soon as possible – reducing the 10-day margin risk. The negative side to this is prices tend to be slightly higher as suppliers can't effectively plan delivery routes in advance.

Largest network of heating oil suppliers

We work with both large national suppliers and smaller independent suppliers all over the country, with more than 200 pricing with us right now. What this means for you is there are always multiple suppliers providing prices in your postcode, however quickly you need your heating oil.

Aberdeen to Weymouth, Norwich to Carlisle and all in-between. Whether you need oil in a hurry, or can sit back, relax and wait for a delivery, we’ve always got a delivery option that suits you.