The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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www.fueloilnews.com | FUEL OIL NEWS | AprIL 2015 17 Fuels l F O N options has dropped so much," said Alan Levine, CEO and chairman of the energy brokerage firm Powerhouse®. "You could recently hedge for $0.11 or $0.12 a gallon, and now you're up to $0.17 or $0.18 range. But a few years ago you were talking $0.30.This is really a great gift to the industry but many will not take advantage of it." The cusTomer A dealer can offer a customer a range of fuel purchasing options. Each has advantages and disadvantages, depending upon how the market swings during the heating season. A dealer can look like a hero or a villain with any option if the market swings the wrong way and the customer looks for someone to blame other than himself or herself. "The enemy is not the 1% each year that converts to gas, or the move-in/move-out, or when customers pass away—the enemy is the other dealer that goes out and get your customer," said Baratz. "And that then becomes you, because now to replace that customer you have to come out with a lowball price. The customer is willing to listen to other offers if he or she feels he or she is not been treated properly. And how do you make them feel they've been treated properly?" Baratz noted that a dealer can typically offer three core pro- grams: variable price (rack plus margin), fixed price or price cap. He favors a price cap program. While he readily admits that works in his favor selling options, he believes the argument easily stand so its own. "With variable price, a customer might pay $3.80 gallon for one delivery and $2.30 a gallon on the next," said Baratz. "There is no real risk there, but I look at risk a bit differently than conventional wisdom. You can rest assured that at some point somebody will go to that customer and say, 'Do you really need that uncertainty? Why don't you buy my 'XYZ program?' And the variable price is great when prices drop, but when they go up you do not look so good." The second option is a fixed price program. "If prices go up the customer is happy, but no one is ever going to call the dealer and thank them," he said. "But if prices go down, you have the winter of 2014/15 where the blame game starts. And somebody is going to go to the customer and say, 'You locked in at $4 per gallon? Didn't you read the news? Didn't your dealer tell you that the U.S. just surpassed Saudi Arabia as the largest producer of crude oil? Didn't he know? Buy from me—I would never do that!" While Baratz noted that the price cap option will never be the winner, it will never be the loser either. The dealer and the customer are protected if prices move higher as with a fixed price program. If prices plummet, the dealer can drop prices as with a variable price approach. The issue becomes selling the customer on supporting the fees by charging, say, $20 per month to cover the option costs. Baratz stated this can be addressed successfully by the dealer though an open and honest discussion on what the fees are for and what they provide. The customer might spend $200 in fees, but they never end up leaving a huge sum on the table. Affordable Fuels, based in Middleburg, Pa., takes advantage of hedging but so far, primarily uses it for fixed price contracts. And it faced limited blowback with the recent price collapse. "We have not had the problems others have had, perhaps because we are very cautious with our customers," said Arden Steiner, Affordable's general manager. "We are careful not to oversell the benefits or make promises or even imply things that you cannot be certain about. As a result, we don't really have any angry customers." As part of that cautious approach, Affordable is currently backing off of fixed price contracts with its customers because Stenier feels the market is not right today for the company's and customer's mutual benefit. On the variable price side, Affordable Fuels offers "spot deals" on 10-day terms and the company has significantly expanded its supplier base to get the best deals at the rack on a given day. While there is notable market volatility, Steiner pointed out that that volatility can be even more severe at the rack. "This is the first time in 12 years that my spread on No. 2 heating oil at the rack is $0.18 between suppliers," he said. "That's more than the margin on some of my high-volume customers. If we didn't diversify as much as we have we could really be in trouble."