October 28, 2020

Dealers share pain of prepaid oil’s ups, downs Sellers locked in like customers

MORRISVILLE, Vt. – Peter Bourne has been hearing from his heating oil customers, and they’re upset.

They pre-paid for home heating oil before winter began, and now it’s selling at a lower price.

“We had one today,” he said earlier this week. It was a commercial customer who buys about 30,000 gallons of oil a year from Bourne’s Inc. and for whom a 27-cents-a-gallon price difference quickly adds up.

His residential customers who ordered fuel on a “pre-buy” price last June or July agreed to pay $2.78.9 per gallon. But someone ordering it Thursday would have paid $2.51.9.

Therein lies the rub: People who bought at fixed prices last summer were betting oil prices would rise as winter approached. But with no major hurricanes, no new international instability and a warm early winter, prices instead have declined.

Bourne, who sells in Morrisville and Waterbury, would love to let his pre-buy customers switch to the lower cash price. But he says he can’t. He’s locked in, too.

Vermont fuel dealers get their oil from wholesale terminals in Montreal, Albany, N.Y. and Portsmouth, N.H. – Montreal, in Bourne’s case. A state law passed last year requires them to secure ahead of time 75 percent of the gallons they’ve promised to pre-buy customers.

Most have done so through futures contracts, which effectively means that they’ve pre-bought, too.

“We’re trying to get our customers to understand that we don’t have a way out of our contracts. We just don’t,” Bourne said. If he wants to meet his payroll, truck fuel and maintenance and other expenses, he has to hold customers to their contracts.

The situation dealers fear the most is not being able to take the oil they signed up for. Dealers pre-buy from wholesalers by agreeing to take a set number of 42,000-gallon loads in a given month. As of early January, some feared that if the weather didn’t turn cold, they would become backed up with supply and unable to take their full allotments.

Many wholesalers charge a holdover fee of 4 to 8 cents per gallon if the oil isn’t shipped in the contracted month. Three late loads at 5 cents a gallon would add $25,600 to the debit side of a dealer’s books, assuming the 42,000-gallon load size.

That would be a tough pill to swallow for fuel dealers, said Shane Sweet, executive director of the Vermont Fuel Dealers’ Assocation. Sweet said his counterpart in Connecticut had recently calculated lost sales around the region due to the warm early winter.

As of mid-January, sales were down from the norm of about 13 million gallons, or $31 million, in Vermont, Sweet said. Sales were off $222 million in Connecticut, $78 million in Maine, $242 million in Massachusetts, $70 million in New Hampshire and $58 million in Rhode Island, he said.

Sean Cota, president of Cota & Cota Oil of Bellows Falls, said slow sales have meant dealers have been unable to take advantage of lower spot prices at the wholesale terminals, because they have to take their contracted oil first.

“We’ve actually been able to haul our contracts, but that’s about it,” said Cota, president of the New England Fuel Institute. “It’s pretty much contracted products; there’s little or no spot pricing,” he said.

Dealers said pre-buy customers might feel better if they recall that in seven out of the past nine years, pre-buy customers have paid a lower price for oil than those who waited until winter to order their heating fuel. In two years, pre-buy customers about broke even, said Tom Johnson of Johnson Energy in Center Rutland.

“This is the one year that obviously didn’t work out in the pre-buy customer’s favor,” Johnson said.

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