Lower crude oil prices: fill up the heating oil tank now?

Crude oil is the cheapest it has been in months. But heating oil customers don’t notice anything. Why does fuel still cost so much? And what should you look out for when buying one?

Oil is at its lowest since the Russian invasion of Ukraine. The price of Brent crude oil from the North Sea fell to a seven-month low of $91.30 per barrel (159 liters) in the middle of the week – even though the oil cartel OPEC+ had announced a reduction in its production volumes at the beginning of the week.

Growth concerns impact oil market

But on the commodity markets, the risks for supply are currently less important than for demand: above all the repeated lockdowns in China. Again and again, the Chinese authorities seal off entire cities of millions to prevent the spread of the corona virus.

This weighs on China’s growth and thus has a direct impact on oil prices; After all, the People’s Republic is one of the largest oil importers in the world. Global growth is not looking good at all, commented analyst Edward Moya from broker Oanda. “And that’s a problem for crude oil prices.”

Heating oil price at record high

But the downward trend in the price of crude oil since mid-June has simply not been received on the German heating oil market. There has been an enormous jump in prices since February.

In July, the average consumer price (including VAT) for 100 liters of light heating oil was around 143 euros, the Federal Statistical Office recently reported. The price had more than doubled within a year. There does not appear to be an end to the price hikes in sight. According to the FastEnergy portal, the average heating oil price in Germany reached a new record high of around 174 euros in August.

High refinery profit margins

This growing difference between the price of crude oil and the price of heating oil is reflected in a high so-called “crack spread” of currently $63 per barrel. What is meant by this is the difference between the refined product and the price of oil. For comparison, the “crack spread” for gasoline is currently only $15.

“The crack spread roughly represents the refinery margin,” explains market expert Robert Rethfeld from Wellenreiter-Invest. In the case of petrol, this margin is now back in the normal range, while it is significantly higher for heating oil and diesel. “In principle, heating oil and diesel are the same product, they are only declared differently as heating oil and diesel,” says Rethfeld.

Strong interaction with the gas price

For the raw materials expert Rethfeld, the reason for the high refinery margins for heating oil and diesel is obvious: “Heating oil is in great demand as a gas substitute.” In fact, many large customers from industry and the energy sector are currently trying to replace the expensive gas. Where possible, convert their firing systems from gas to oil.

“If we correctly interpret the importance of heating oil as a gas substitute, then falling gas prices should also relieve the heating oil price,” concludes Rethfeld.

Regional special problem: the Rhine level

Heating oil and petrol station customers in southern Germany are now faced with an additional problem: the extreme heat and lack of rain have led to historic lows on the Rhine. Due to the persistent low water, the transport of refined oil products on one of the most important German waterways can only take place to a limited extent.

No wonder, then, that heating oil prices in southern Germany have risen particularly sharply. In any case, the south is hardest hit by the high heating oil prices, as the density of oil heating systems is also the highest nationwide here.

Seasonality suggests that prices will continue to rise

Heating oil customers are faced with the question of whether they should quickly fill up their tanks again before winter or whether they should wait a little longer. For them, the picture is mixed: on the one hand, growing concerns about demand, especially with a view to China, should ultimately dampen the rise in prices for heating oil and diesel or ensure a gradual price decline.

At the same time, the price of heating oil usually goes up just before the start of the heating season. This is shown by a look at the seasonal trend, according to which the heating oil price rises on average from August to February.

Gas prices as a leading indicator

Above all, however, it is worthwhile for heating oil customers to take a look at the development of gas prices: Falling gas prices can be an important early indicator of a price drop for heating oil as well. The European natural gas future TTF reached a record high of EUR 343 per megawatt hour at the end of August, and is currently around EUR 100 lower.

Last but not least, for heating oil consumers in southern Germany in particular, the level of the Rhine should provide a valuable indication of when the pressure on heating oil prices can be expected to ease.