Sticker shock at the thermostat: Why heating oil prices are going up

Here's a great example of why they're called futures markets and not presents markets: There's plenty of heating oil to go around -- indeed, inventories are at their highest level in nearly three decades -- and yet prices are going up.

Chalk it up to the disconnect between how things are now and how commodity traders bet they'll be in the not-too-distant future. Supplies of heating oil stand about 33 percent above their five-year average, we learned from the Energy Department on Thursday, something that would ordinarily be considered a glut.

Gluts are bad for producers but great for consumers, thanks to the good old law of supply and demand. Barring a sudden sustained blast of Arctic air settling over a chunk of the country, the price of heating oil, if anything, should probably be coming down.
And yet it's getting more expensive. The average national price ticked up 3 percent in just the last week, according to the Energy Department. So what gives? Here's what: Energy traders are putting their blinders on and betting big on a worldwide economic recovery.

"Market pricing is entirely forward looking in terms of the global situation," says John Kilduff, senior vice president of energy at MF Global (MF) in New York, which provides execution and clearing services for derivatives products. "The various aspects of good news are being priced into the economic recovery story, while all the bad news is being discounted."

Heating oil is in the same family of petroleum distillates as diesel fuel, so these commodities trade together. Here in the U.S. we fill our tanks with gasoline, but the rest of the world runs on diesel, Kilduff says. Energy traders see a global recovery at hand and figure demand for diesel will soar.

That's why it's getting more expensive for folks to heat their homes.

Similar forces play a part in rising food prices, we wrote Wednesday, proving two things. One: It's very much open to debate how much futures markets distort prices; and Two: People really like to shoot the messenger.

Fire away.
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