Uses of Heating Oil

The primary use for heating oil is space heating, both in residential and office buildings, but some also use it for heating water. According to the Energy Information Administration (EIA), about 5.7 million households in the United States depend on heating oil during the winter months.

Since space heating is the main use of the commodity, the demand is highly seasonal and often affected by weather situations. Consequently, heating oil futures also show significant seasonal variations, with prices going up during the winter months and declining in the summer months.

The Largest Producers and Consumers of Heating Oil

The world’s production of distillate fuel oil has grown steadily over the years to keep up with the increasing demand. As a result, heating oil futures are becoming more popular on commodity exchanges. The United States has the biggest refining capacity, followed by China, and Russia. Other countries with big refining capacity are India, Japan, South Korea, Saudi Arabia, Brazil, Germany, and Canada.

The countries that produce the most heating oil are the United States, China, India, Russia, Germany, Japan, Soth Korea, Brazil, Italy and Saudi Arabia, in that order. The largest consumers of the commodity include the US, the UK, the Republic of Ireland, and Canada.

In the United States, about 85 percent of the demand for heating oil comes from the Northeast region, with New York, Pennsylvania, Massachusettes, Connecticut, and Maine being the top five states that consume the most heating oil.

Why Trade Heating Oil Futures Contracts?

The reasons for trading heating oil futures vary with the trader’s needs. It could be for speculation, but it could also be for hedging against inflation or diversifying one’s portfolio. Some stakeholders in heating oil production or distribution can use the futures market to manage their price risk.

Hedging against price fluctuation: The main stakeholders in the heating oil market are the refining companies and the distributors. The crude oil refiners can sell heating oil futures contracts to secure a good price for their product, while the distributors can buy the futures contract to ensure a stable supply of the commodity.

Speculation: In addition to the producers and distributors, there are many speculators in the heating oil futures market whose only intentions are to benefit from the regular fluctuations in heating oil futures prices.

Diversifying portfolio: Many investors and fund managers see the commodity market as a place to diversify their investment portfolio. Spreading their investments across many asset classes helps to reduce their risk exposure in each specific market. Since heating oil futures offer a blend of liquidity, volatility, and predictability, it is one of the markets these investors operate in.

Inflation hedge: Just like other commodities, heating oil prices rise when there is rising inflation. So, buying heating oil contracts may be a good way to protect your wealth from the effects of inflation over the long term.

How Heating Oil Futures Trade

Heating oil futures contracts are traded on the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX), which is a member of the Chicago Mercantile Exchange (CME) Group. The contracts can be traded even after the regular trading hours through their electronic trading platforms.

On the CME Group, a heating oil futures contract (HO) settles for 42,000 gallons or 1,000 barrels of the commodity, and the price quotation is in U.S. dollars and cents per gallon. The minimum price fluctuation is $0.0001 per gallon or $4.2 per contract.

Monthly contracts are listed for the current year and the next three calendar years plus an additional month. The monthly contracts for a new calendar year plus one month are added following the termination of trading in the December contract of the current year.

The last trading day in a current contract month is the last business day of the month prior to the delivery month. At expiration, the contract is settled by physical delivery on the NYMEX, but it is cash settled on the ICE.

To start trading heating oil futures, all you need is to create an account with the exchange through your futures broker and deposit the required margin. Futures contract are highly leveraged; with a fraction of the contract’s worth, you can trade it. Be careful with leveraged instruments though — while they can make you more money, you can also lose more than you planned!

Heating Oil Futures Trading Strategies

Building trading strategies for heating oil futures certainly is possible, and there are quite a lot of edges lying around in the market. We trade quite a few heating oil trading strategies, and have found that it makes an excellent addition to a portfolio of strategies on other markets, by reducing risk and increasing potential returns.

In general, the heating oil market works quite well with trading strategies that are based on some type of trend following approach.

If you’re interested in getting edges and ideas for trading strategies, we recommend that you check out our unique edge membership! 

Factors That Affect Heating Oil Futures

There are many factors that can affect the prices of heating oil futures. These are some of them:

Weather and seasonality: The demand for heating oil increases during the cold months of winter, driving up the price of the commodity. In the warmer months, demand declines and so does the price.

The price of crude oil: Crude oil prices significantly affect heating oil prices because crude oil is the raw material for distilling the commodity. Thus, any factors that affect crude oil prices (for example, a major announcement from OPEC) will also affect the price of heating oil.

Cost of transportation: Heating oil prices in any region can be affected by the cost of delivering the commodity to that region. Thus, it may be cheaper in places that are closer to the source.

Availability of alternative heating fuels: Natural gas competes with heating oil as a source of energy for heating buildings. In places where natural gas is cheaper, people will opt for natural gases.

Heating Oil Seasonality

Here follows a seasonal chart of the heating oil futures market:

source

Conclusion

Heating oil is an essential commodity in places where natural gas is unavailable or too expensive. It is primarily used for heating homes and offices. Both the CME Group and the ICE offer heating oil futures contracts.

Here is our archive with articles about other tradeable futures markets.

FAQ

Who Trades Heating Oil Futures and Why?

Various stakeholders engage in heating oil futures trading. Producers and distributors may hedge against price fluctuations, while speculators aim to benefit from price changes. Investors and fund managers also trade for portfolio diversification and as an inflation hedge.

How Do Hedging Strategies Work in the Heating Oil Futures Market?

Refining companies and distributors can sell or buy heating oil futures contracts to secure favorable prices and ensure a stable supply, thus managing their price risk.

How is Heating Oil Futures Trading Conducted?

Trading heating oil futures involves creating an account with an exchange through a futures broker, depositing the required margin, and using the electronic trading platforms. It’s important to note that futures contracts are highly leveraged.