The Wall Street Journal-20080115-Heating-Oil Price Surge Burns Dealers
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Heating-Oil Price Surge Burns Dealers
The dark days of winter should be a bright spot for Ray Hilyer. This year, they are plain gloomy.
As president of Putnam Valley Petroleum Corp., a two-truck heating- oil dealer north of New York City, Mr. Hilyer is hurting as the prices demanded by his suppliers surge. Unable to unload the entire increase on his customers, he's resigned himself to lower profit margins this season, and he is considering dipping a toe in oil-futures markets next year. "It's a tough game out there," he says.
As the U.S. winter deepens, heating-oil merchants are feeling the blues. Heating-oil futures followed the price of crude to settle at an all-time high of $2.7404 a gallon Jan. 2, frightening not only consumers in the Northeast, the world's largest market for heating fuel, but the owners of the tank trucks that serve them. Yesterday, following a snowstorm that blanketed New England, futures rose 2.1% on forecasts of frigid temperatures and settled at $2.5892 a gallon on the New York Mercantile Exchange.
Mostly small and family-owned, heating-oil dealers say high prices have strained relationships with both banks and customers as they borrow millions more for inventory and bear the brunt of consumer anger over fuel costs.
Profits have been squeezed. Gross margins for heating-oil retailers averaged 21% from October through December of 2007, down from 36% in the same period the year before and from as high as 88% in 2001, according to calculations based on data from the Energy Information Administration.
Customers are wincing, too. Residential heating-oil prices in the Northeast averaged a record high of $3.434 a gallon in the week ended Jan. 7, the Energy Department said.
But dealers say there's a lag between wholesale- and retail-price increases as retailers seek to maintain market share in a brutally competitive business.
"Generally, in a moving-up market, it's very difficult to pass on" price increases, said John Huber, president of the National Oilheat Research Alliance, an industry group in Alexandria, Va.
Many dealers purchase inventory using bank lines of credit. With wholesale heating-oil prices much higher than they were a year ago, that means scrounging for additional loans.
"It has major implications for their working capital," said Andrew Heaney, president of Heat USA, a New York-based heating-oil-buying group that represents about 40,000 homeowners. "It's creating its own kind of credit crunch within this industry," he added, referring to the global credit squeeze that resulted from failed mortgages.
Not every retailer has seen profits shrink. Star Gas Partners LP, which, with 416,000 customers, claims to be the nation's largest home- heating-oil distributor, said in its annual report that it boosted heating-oil profit margins 4%, to about 72 cents a gallon, in the fiscal year ended Sept. 30, 2007, while the wholesale price Star Gas paid rose 1%.
Threatening the market share of the entire industry is natural gas, which has become the fuel of choice for newly constructed U.S. homes and has slowly weakened heating oil's grip in the Northeast. In 1997, 36% of Northeastern households heated with oil; this winter, the EIA expects 32% will. Natural gas's share has grown in the same period, from 46% to an estimated 55% today.
