Oil heat pre pay contracts.

Summer starts, so here in the Northeast the oil heat pre buy contract offers come in. This week I received the pre buy options for the oil I need to winter heat. Price this year is 2.599 per gallon at estimated usage of 600 gallons. Today’s cash price is 2.499 per gallon. So my options are :

[ul]
[li]Pre-Pay the 2.599 and that is fixed for the year.[/li] [li]Pre-Pay the 2.599, plus .20 cents per gallon and I have “downside” price protection. Meaning I do not pay more, but pay less if the day price is less that day at each day of fill-up. [/li]
[li]Pay in advance the estimated cost of the day rate times the 600 gallons. Today’s rate being 2.4999[/li][/ul]

For years I have ignored the prepay options, and just made a lump sum payment in September for what I think the oil bill will be for the year.

I am curious as to what other think. Should I reconsider this option ?

I remember stories from 2008/2009 where the big run up in the price of oil made people want to pre-pay for heating oil (OMG! It will be $300/barrel by winter! I’d better lock in $150/barrel prices now!) and then getting burned when the price collapsed (OMG! It’s now $30/barrel and I am locked in to $150/barrel prices!). Your second option is ideal if you think that is going to happen again. But I think the Oil market is a little more mellow these days than it was back then.

Overall insurance is designed to cost the public more money in the long run then they can get back from it. This does include things like this. The oil company is taking risk and mitigates that risk to it’s favor, or at least that’s the norm. The oil companies also got burnt in the past with locked in prices.

That does not mean you can’t come out ahead, just it’s not stacked in your favor.

Moderator Action

Since this is seeking opinions, let’s move it to our opinion forum.

Moving thread from General Questions to In My Humble Opinion.

As far as locking in prices, here’s my attitude: I’d be basically betting the oil supply company on whether oil prices will go up. Now, they do this full time and I don’t, and they set the odds, so I’m pretty sure I’m going to lose that bet more than I win it.

Now, if you’re in a situation where a big jump in heating oil prices means that come February you have to decide between paying for heat or rent, maybe it’s worth it to you to buy insurance, and pay more in the long run, to ensure that you won’t pay too much more in any one year. Which just shows again how expensive it is to be poor (relatively). Or maybe you’d just prefer to have a stable budget and are willing to pay a bit more for that. But recognize that locking in a price will generally mean you’re paying extra.
And, I’m a bit confused by the options (admittedly I’ve never really dealt with buying heating oil). There’s no option for ‘pay spot price for each delivery when it arrives’? It seems that your oil company is making you pay now for the oil they’ll deliver in February, and they’ll charge you the cash price against that credit. Which just seems like loaning them money for nine months at zero interest. If you’re going to pay nine months ahead of time, seems like you should get a reasonable discount.

I will contract shortly for a fixed price for the season. I’ll pay a monthly bill, I’ll owe something in next year if I use more oil than typical, I’ll get a credit (or could ask for a refund) if I use less. If the price of oil drops enough I’ll be losing on the deal, if it rises I’ll make out on the deal. The oil company gets insurance to cover their potential losses.