Written on: May 30, 2012 by Phillip J. Baratz
Paraphrasing a song from Springsteen’s latest album, we do live in a land of hopes and dreams, but sometimes, reality must be considered as well.
We have just completed a winter with the highest (wintertime) prices ever, and had it not been for the extremely mild weather, it is hard to say how many (more) customers would have converted to another heating fuel. The futures market swings back and forth between reports of weak global economies and strengthening economies. It vacillates from increasing terror and nuclear caution all the way to prospects for peace. The underpinning reality for oil prices, as a global market, is simply that we just don’t know where prices are headed.
Though we all wish for world peace and thriving economies, we shouldn’t get carried away with those hopes. However, while there are causes for concern, the supply of oil is quite ample, the worst of the housing market catastrophe is behind us, and we may well be moving towards a time of global stability. With prices (NYMEX heating oil) having spent the last six months above $3.00/gallon, maybe we are poised to have the true economic realities (lots of oil and weak demand) bear their unintended fruit, in a sharp lowering of prices. Prices were “all the way down to” just above $2.00 per gallon just last winter, and that level should be viewed as an optimistic target for those who market, distribute and consume heating oil. I don’t know that we will get there, but if we rallied over a dollar during a time of economic uncertainty and warm weather, why would falling the same amount be out of the question?
Well, too much attention is placed on the fears that make our markets seem to be unpredictable, unsustainable and illogical (to say the least). Why do protests in Greece drive oil prices higher one day, only to seeing the same protestors “to blame” for dropping prices? Most of the support in oil prices is premised upon two things, and really only two things. Signs (and potential for) indicating improving economic situations is the first one. That, while a moving target, is a lot less volatile than the second. Weekly, monthly and quarterly reports of financial health rarely come as shocks, and more regularly reinforce bullish or bearish opinions. Rarely does an economic report stop prices on a dime and cause them to reverse.
On the other hand, the second “thing”—the terror/nuclear/ war triumvirate—causes unpredictability to be the norm. What will happen in Iran, Iraq or Korea has outsized implications on oil prices. What if the world’s economies had been strong over the last few months? What if we had a bitterly cold winter? Where would heating oil prices be? $4.00? $5.00? Higher? The fear in the marketplace is, unfortunately, the greatest fear of all—the fear of the unknown.
Though we might be just stating the obvious, and repeating what we have been saying for years…if your customers (or you) are hopeful—with good reason—that prices might fall, but scared—with good reason—that prices might rise dramatically, what can you do? If you allow prices to just float with the market, and charge a variable price to your customers, the “fear” scenario might cause even more attrition when customers leave for a better deal—a discounter, another dealer offering “a program”, or converting (never to be heard from again) to natural gas. If you push customers to fix their price of oil, in anticipation of a rally, but instead we have a winter that sees prices plummet (which, if you think about it, would be great—if accompanied by a good number of HDDs), how many customers will leave? How many will try to break their contracts? How many will be unhappy with you?
Caps DO—at a cost—offer the best of all worlds. You need to be honest and upfront with customers, as to the cost to offer a cap—it can be 25 cents per gallon, it can be 35 cents per gallon; however, if neither $2.00 per gallon nor $5.00 per gallon is unrealistic, is the “insurance protection” afforded by a cap not worth it? We have done many case studies that prove irrefutably that cap customers are both the most profitable AND the most loyal of all customers. Aren’t those the ones that you want?