Hedging Against Rising Heating Oil Prices using Heating Oil Futures

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Heating Oil Product Overview

Heating Oil futures (HO) at CME Group allow you the opportunity to profit from or hedge against the price movements of this refined byproduct of crude oil.

More than 8 million homes in New England and the Central Atlantic region lack access to natural gas and depend on heating oil for energy during the coldest months of the year.

However, the heating needs of these households take a backseat to the gasoline demands of the nation, as both are byproducts of crude oil and must share the services of refineries already running at capacity.

The juggling of the capabilities of oil refineries coupled with the seasonal factors that impact heating oil’s demand make the trade in HO a dynamic and beneficial marketplace for a variety of speculators and hedgers.

The Contract

Each Heating Oil futures contract represents 42,000 gallons of heating oil with a minimum price fluctuation of $.0001 per gallon, or $4.20 per contract. The contract trades Sunday-Friday from 5 p.m. to4 p.m. Central Time (CT) with a daily 60-minute break at 4 p.m. CT.

Trading the Market

Traders of HO should be alert to the factors impacting the price of heating oil such as: weather, the price of crude and the capacity of oil refineries.

As heating oil is used for heating, the demand for the product rises as the temperature drops. Indeed, heating oil is one of the most seasonally impacted of all the commodities; market participants should monitor news about weather and oil in order to best seize profit opportunities and hedge against risks in the heating oil market.

Heating Oil

Топочный мазут — вид нефтяного топлива, получаемого из тяжёлых остатков переработки нефти, угля и горючих сланцев. Используется в качестве котельного топлива в энергетике, судоходстве и промышленности. По составу очень близок к дизельному топливу.

Топочные мазуты различаются по следующим показателям:

  1. Индекс вязкости (возможность перекачки, распыление в топке)
  2. Содержание серы
  3. Температура застывания
  4. Зольность (отложения золы на котлоагрегатах)
  5. Плотность
  6. Температура вспышки (пожароопасность).

Химический состав и свойства

Физико-химические свойства мазута зависят от химического состава исходной нефти и характеризуются следующими данными : вязкость 8—80 мм²/с (при 100 °C), плотность 0,89—1 г/см³ (при 20 °C), температура застывания 10—40°С, содержание серы 0,5—3,5 %, золы до 0,3 %, низшая теплота сгорания 39,4—40,7 МДж/моль.

Возможности для трейдера

Существенное максимально допустимое плечо при торговле топочным мазутом при умеренной волатильности делает этот инструмент достаточно интересным для торговли.

Как заработать на Heating Oil за 3 шага

  1. Откройте счет
  2. Пополните ваш счет и получите бонус за пополнение до 100% от первой суммы.
  3. Выберите инструмент в терминале и инвестируйте в рост или в снижение.

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Why Trade Heating Oil? Surprising 1.6% Growth Makes For An Interesting Bet In 2020

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Last Updated on April 2, 2020

3 Reasons You Might Invest in Heating Oil

The best reasons for investing in heating oil include:

How Does Heating Oil Act as a Home or Business Cost Hedge?

Homeowners with high annual heating bills may want to buy heating oil to hedge these expenses.

Businesses that depend on active operations during the winter months, such as restaurants, ski resorts and hotels, may want to buy heating oil to hedge the unpredictable variable cost of heating their properties.

Speculating on Oil Demand

Heating oil investing provides a way to express a bullish view on crude oil.

Investors optimistic about global growth and pessimistic about the supply of fossil fuels available to meet demand may want to invest in heating oil.

As emerging market countries modernize their economies and build more housing and businesses, the need for fuels to power factories and heat buildings will grow. The same supply/demand imbalances that favor crude oil should also benefit heating oil.

Betting on Weak Dollar

A weaker US dollar is generally positive for the entire commodities complex, including heating oil.

Investors who believe that debts and deficits in the United States will pressure the dollar over the long run may want to place some of their investment funds in commodities like heating oil.

Should I Invest in Heating Oil?

Heating Bill Hedge: People who live in cold climates and use heating oil to heat their homes may want to invest in the commodity in advance of the winter months. Using a heating oil investment to protect against the cost of winter utility bills may be a sensible risk mitigation strategy.

Bet on Growth: Investing in heating oil also provides a way to bet on global economic growth. As emerging markets expand, many analysts believe that fossil fuel demand will outstrip supply and lead prices higher. Also, newly developed areas often lack natural gas infrastructure and need heating oil as a source of fuel.

Diversify Your Portfolio: Heating oil may be a viable way to diversify an investment portfolio. Most traders have assets heavily concentrated in equity and fixed income markets. Commodities provide diversification as they generally have low correlations with stocks and bonds.

All investments carry the possibility of losses, so traders should consider the risks of investing in heating oil. Some risks include:

  1. Warmer than average weather could send prices lower.
  2. Strength in the US dollar could produce weakness in commodities prices including heating oil.
  3. Alternative sources of heating and technological advances in insulation materials could depress demand for heating oil.

What Do the Experts Think About Heating Oil?

Most experts agree that the price of heating oil is closely tied to both crude prices and refinery capacity.

In the view of many analysts, growing demand for crude combined with strains on refining capacity could drive heating oil prices higher. Janet Kong, a senior executive with multinational oil company, BP, believes that demand for distillates such as heating oil is driving higher global demand for crude oil. Other analysts concur with this view:

“The big surprise … has been on the distillate side, where it looks like we will hit 1.6 percent growth.”

-Matti Lehmus, vice president of oil products at Neste Oil

Robert Campbell, head of oil products analysis at Energy Aspects, believes that strong demand for refined oil products is incentivizing refineries to increase their output of products.

How Can I Invest in Heating Oil?

Investors have a few direct and indirect ways of investing in heating oil:

Heating Oil Trading Methods Compared

Method of Investing Complexity Rating (1 = easy, 5 = hard) Storage Costs? Security Costs? Expiration Dates? Management Costs? Leverage? Regulated Exchange?
Heating Oil Futures 5 N N Y N Y Y
Heating Oil Options 5 N N Y N Y Y
Heating Oil ETFs 2 N* N N Y N** Y
Heating Oil Shares 2 N N N N Y Y
Heating Oil CFDs 3 N N N N Y Y

*Most energy ETFs invest with futures and avoid storage costs.
**Some energy ETFs offer exposure to 2X or 3X the movement in commodity prices.

Heating Oil Futures

The New York Mercantile Exchange (NYMEX), a commodities and futures exchange operated by the Chicago Mercantile Exchange (CME), offers a heating oil futures contract that settles into 42,000 gallons of heating oil per contract. The contract trades globally on the CME Globex electronic trading platform.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. Heating oil futures contracts expire on the last business day of the month preceding the delivery month. At expiration, traders must either accept physical delivery of heating oil or roll their positions forward to the next trading month. Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Heating Oil Options

The NYMEX offers an options contract on heating oil futures. Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of heating oil futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in heating oil futures to profit from their trades. Heating oil options contracts expire three business days prior to the expiration of the underlying futures contract.

Heating Oil ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There is currently only one pure-play heating oil exchange-traded fund (ETF):

    The United States Diesel-Heating Oil Fund LP –

In addition, there are many ETFs that invest more broadly in the energy sector including these popular funds:

Shares of Heating Oil Companies

There are many companies engaged in extracting, refining and selling crude oil and crude oil products. While these companies are not pure-play investments in heating oil, the performance of their shares is correlated with crude oil and refined crude products.

Shares of oil companies also react to other factors including the performance of management and the stock market in general.

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5 Leading Diversified Oil Companies

Company Current Price Overview Exchange Founded Number of Employees Interesting Fact
BP
Headquartered in London but the USA houses the lion share of its operations. London (LSE),
Frankfurt (FWB),
New York (NYSE) 1908 74,000+ Burmah Oil Company, the company that eventually became BP, was the first to discover oil in the Middle East. ExxonMobil American multinational oil and gas corporation. New York (NYSE) 1999 80,000+ Largest refiner in the world with a capacity of nearly 6m barrels per day. Total S.A. French energy multinational. Paris (CAC),
New York (NYSE),
Amsterdam (Euronext) 1924 100,000+ Total has over 900 subsidiaries covering all areas of energy. Royal Dutch Shell British-Dutch multinational headquartered in The Netherlands. London (LSE),
Amsterdam (Euronext),
New York (NYSE) 1907 90,000+ Shell has over 40,000 service stations worldwide. ConocoPhillips The world’s largest independent pure-play exploration and production company. New York (NYSE) 1875 12,000+ Conoco Inc. and Phillips Petroleum Co. merged in 2002 then in 2020 spun off its downstream assets as Phillips 66.

One way to invest in heating oil is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on heating oil prices without purchasing ETFs, futures, options or shares of oil companies. The value of a CFD is the difference between the price of heating oil at the time of purchase and the current price. CFD traders, therefore, have direct economic exposure to the commodity.

Many regulated brokers worldwide offer CFDs on heating oil. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to heating oil prices without having to manage complicated futures or options positions.

Plus500 is one of the top brokers in heating oil CFD trading. 76.4% of retail CFD accounts lose money.

76.4% of retail CFD accounts lose money.

Ready to Start Trading Heating Oil?

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade heating oil and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

One of the leading CFD brokers for trading energy commodity CFDs, like heating oil, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade heating oil and hundreds of other CFDs
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

I am trading crude oil futures, and I want to hedge without using CAD/USD futures, what other assets are a good hedge against WTI CL futures?

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When I think about hedging commodities, I consider four main strategies:

Selling Futures: Protection Against Falling Prices

Buying Put Options: Protection Against Lower Prices and Opportunity if Prices Rally

Selling Call Options: Increase Your Selling Price in a Stable Market

Buy a Put and Sell a Call: Establish a Selling Price Range

I didn`t understand if you don`t want to use anything related to futures, or just futures contracts.

  • Assuming that you don`t want to hedge using futures contracts, you can consider using options of futures.

Now, if you want a different kind of asset, you can select di.

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