With upstream energy giants reporting bumper profits you might well wonder why UK households are facing such high energy bills this winter. How much it’s going to cost to heat our homes is at the forefront of all of our minds. And understanding what causes prices to rise and fall isn’t always easy as there are many factors both globally and here at home that affect the price we pay. So in this blog, we’re going to take a look at what causes heating oil prices to go up and down, as well as what you need to think about when considering when to buy your fuel.
Domestic heating oil prices have historically been volatile and go up and down on a daily basis, but never more so than over the past 2 or 3 years. Prices were low in early 2020 following the collapse in demand due to the ongoing impact of the Covid-19 pandemic. Businesses were closed, travel was restricted and oil producers were left with a glut of crude oil that left them scrambling to find space to store it. All leading to prices plunging dramatically. But in the last year, prices have been rising to the highest level seen in several years.
So what affects the price of oil? In short, there are three main factors: current supply, future supply and expected global demand. We’re going to break this down and take a more detailed look at some of the factors that have an influence on the price you pay to heat your home and keep your oil central heating running.
Political instability:
Political instability has a significant impact on global oil prices, evidenced by the Russian invasion of Ukraine in February this year which resulted in volatility as crude oil prices spiked due to fears of supply disruptions. Russia is the second-largest oil and gas exporter in the world, and Ukraine is a major transit route for Russian gas. Added to the fear of disruption of supply was the fear that Russia would retaliate to the imposed sanctions by withholding oil. Rest assured that the UK is not as dependent on Russian imports as Europe, with only 4% of its natural gas being imported from Russia last year, and 8% of total UK oil demand. But EU nations will stop buying Russian crude oil imported from the sea from 5th December this year, which means they need to find an alternative supply. Especially important for countries such as Lithuania and Finland that relied on 80% or more of their supply coming from Russia in 2021 according to the BBC news.
The good news is that more oil has been released onto the world market and EU countries can buy their oil from other producers. Earlier this year the IEA, which is made up of 31 member countries and 8 association countries, released 180 million barrels-worth of crude from their stocks, and President Biden also took action to boost US output and release additional reserves.
Global influences:
Exchange rates can impact the price we pay in the UK for our heating oil. Countries that buy crude oil, as well as those that produce it, trade in US dollars. Therefore when the US dollar is weak, the price of oil is higher in dollar terms, and the reverse is true when the US dollar is strong.
The main influencer of fluctuations in oil prices is OPEC (the Organization of Petroleum Exporting Countries). OPEC is made up of 13 countries and controls a large proportion of the world’s supply of oil reserves. The consortium sets production levels to meet global demand and can influence the price of both oil and gas by increasing or decreasing production. In October this year, OPEC announced the biggest cut to oil production since the start of the pandemic in a bid to stabilise prices. This leads us to take a look at supply and demand.
Supply and demand:
As with any commodity, when supply exceeds demand, prices fall. Equally the reverse is true, and when demand exceeds supply, prices rise. One of the biggest factors affecting demand for crude oil is economic growth, which can affect prices not just on a global level but in the UK too. UK prices historically have been impacted by global supply and demand, but also as we head towards the colder winter months, people use more heating oil to heat their homes.
The weather:
Supply and demand can also be affected by the weather. Periods of sustained cold weather means we all use more heating oil, so demand increases, invariably resulting in rising prices. And whilst traditionally domestic heating oil prices used to fall in summer months as demand tends to be a lot lower in warmer weather, this is not something we can entirely rely on given the current volatility within the energy market. Prices can and do still fluctuate as there are so many other influences that affect the cost of your home heating oil.
Worried about heating your home this winter? Read our recent blog for tips on how to save on energy costs during the winter months.
Natural disasters:
Another factor causing oil prices to fluctuate is natural disasters which affect the supply of crude oil. One example is back in 2005 when Hurricane Katrina struck the southern US. The barrel price of oil rose due to almost 20% of the US oil supply being affected.
So, what does this winter hold for heating oil prices in the UK?
It’s always tricky to predict what will happen to oil prices in the future, and the simple truth is we don’t really know. One thing is for sure, here in the UK we’re heading for colder weather and dark nights when we’ll all be reaching to switch on our oil fired central heating, which will result in increased heating oil demand. In addition, with OPEC planning to curtail oil supplied to the market from November, and the EU embargo on crude oil imports due to kick in in December, we could all be looking at higher prices and market volatility. But we’re here to help!
What can I do?
Whilst there is nothing we can do as individuals to control global oil prices, no matter what happens to the price of oil, there are still things you can do to keep your costs down. We're all feeling the squeeze with the cost of living crisis, so take a look at our tips for getting ready for winter for some simple things you can do that really can make a difference to your energy usage at home. We'd advise you to plan ahead and avoid ordering at times when demand for home heating oil will be high, for instance at Christmas or when there's a cold snap forecast. Remember too that when ordering your heating oil, generally speaking, the more you order, the lower the price will be. Our quick guide to checking your fuel levels will tell you all about the warning signs for when your heating oil is running low, and when and how to go about measuring the amount of fuel you have left.
And with our Flexi Saver Plan, we can help you budget for those winter bills, and help to ease the financial burden by making your domestic heating oil bills easier to pay. It’s completely flexible so you can save as much or as little as you want each month towards your next heating oil bill - and you can even ask for your money to be refunded at any time. It comes with a free upgrade to our Premium Heating Oil as well – a more economical fuel that makes your money go further as it’s up to 15% more efficient than standard heating oil. And unlike some suppliers, there's no ongoing service charges or cancellation costs.
So whether you’re interested in knowing more about our Flexi Saver Plan, would like to know what the current price of domestic heating oil is, or would like a chat about your individual circumstances, we’re here for you. Give us a buzz on 01423 770 666 or email us at helpoil@northernenergy.co.uk.