Learn About Futures Insider for December 8, 2011:Heating Oil

Primarily used as a fuel to heat residential homes, heating oil is derived from domestic refineries as well as imports from foreign countries. This flammable liquid petroleum product is often considered seasonal because of this use. The contract specifications in this report will refer to the No.2 fuel oil NYMEX futures contract.

Contract Size: 42,000 U.S. gallons

Price Quote & Tick Size: U.S. dollars and cents per gallon; minimum fluctuation is $0.0001 (0.01¢) per gallon ($4.20 per contract).

Contract Months: 36 consecutive months.

Trading Specs: Open outcry trading is conducted from 9:00 AM until 2:30 PM ET. Electronic trading is conducted from 6:00 PM until 5:15 PM via the CME Globex® trading platform, Sunday through Friday. There is a 45-minute break each day between 5:15PM (current trade date) and 6:00 PM (next trade date).

Daily Price Limit: $0.25 per gallon ($10,500 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $0.25 per gallon in either direction. If another halt were triggered, the market would continue to be expanded by $0.25 per gallon in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session.

Trading Symbols: HO

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Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Heating Oil Facts

Heating oil is usually included in the distillate fuel oil family as designated by refineries. These distillates can include diesel fuel and heating oils which is why the heating oil futures contract may be considered for use in hedging for diesel fuel and jet fuel. Fuel oil – or No 2 fuel oil – is usually the second largest resultant “cut” from a barrel of crude oil after gasoline. Delivered by tanker truck to residential and commercial buildings, fuel oil can be stored in tanks until required for boiler or forced air furnaces.

The top five consuming states are shown in the following illustration:

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Distillate products from domestic sources or imports from Canada or Venezuela may be shipped all over the United States via pipelines, tankers, and rail cars. Central distribution areas (like New York Harbor) or storage terminals may hold fuel oil until redistribution. In the United States, the typical season for heating oil use is from October through March. Refiners often produce heating oil throughout the summer and fall months and store it for winter use; however, they may also refine heating oil in the winter.

Like gasoline, the price of heating oil is determined by more than one factor. Costs to produce and distribute the product are just a couple of examples. Overall, the following chart illustrates the rough components:


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*Data courtesy of EIA

Price highlights for this market include:

During the war years, the focus was on providing gasoline for the military. This led to rationing of other distillate products, especially once petroleum supplies from North Africa were disrupted. Heating oil was strictly rationed, with some commercial buildings in 1943 warned of being heatless and the focus fell to providing heat to homes with children. The 1970s were also an active time for heating oil and other petroleum prices as the energy crisis built. In 1973, the average price of heating oil was between 28 and 30 cents per gallon. At the same time, Nixon was encouraging rationing of the fuel oil. In 1975, a 60 cent per barrel import tariff was dropped in an effort to save consumers about 1.5 cents per gallon on foreign fuel. By 1979, the average price of home heating oil had reached 90 cents per gallon.
Domestic gasoline demand fell in 1980, but supply and price controls via OPEC members helped keep heating oil futures prices well above 50 cents per gallon through the early part of the decade. As early as August of 1985, analysts were beginning to predict a drop in fuel prices stemming from an increase in imports from Canada, Italy, Romania, and China.
1986 saw a steep decline in heating oil prices, dropping below 50 cents per gallon amid a collapse in crude oil prices.
The Iraqi invasion of Kuwait and subsequent Gulf War helped spike heating oil prices again in 1990. After jumping above $1 per gallon, prices would retreat back towards 50 cents a gallon. In the late 1990s, prices would see pressure from what some analysts termed an "oversupply" of petroleum, leading futures prices down to a record low around 29 cents per gallon.
In 2000, supply concerns appeared on the scene again, spiking prices above $1 per gallon. Prices retreated back towards 50 cents a gallon less than a year later, only to spike again in 2003, this time hitting $1.50 per gallon. Cold weather and a Venezuelan oil strike helped propel prices higher.
Prices continued to trend higher through the early 2000s, finally breaking above $2 per gallon following the disruptions to refineries after Hurricane Katrina. Prices would briefly dip back below $1.50 per gallon before heading higher.
In 2008, a combination of market forces - including record high crude oil prices - helped heating oil futures hit a record price high of more than $4.15 per gallon. Like other markets at the time, a combination of demand concerns on economic slowdown weighed on prices, sending them back below $1.50 per gallon by the end of the year and into 2009.
In 2011, prices would strengthen again, heading back above $3 per gallon.

Key terms for this market include:

Distillates - liquid products concentrated or extracted by distillation, a physical separation process based on different volatilities in boiling.

Fuel Oil #2 - refers to the specific liquid petroleum product that is used in residential and commercial situations for furnaces or boilers to generate heat - heating oil.

Key Uses

Heating oil is used primarily as a fuel to heat residential homes; mainly in New England and the Central Atlantic States. The following chart illustrates the residential use sales by thousand gallons, roughly divided by region.

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*Data courtesy of EIA

Key Concerns

Crude Oil Prices – Since a large component of pricing heating oil is based on the price of the crude oil, fluctuations in one may incur changes in the other.

Seasonal Demand – Price volatility may change based on the perceived consumer needs for winter heating

Weather – Since a large percentage of the consumer base for residential heating oil is in the Central and North Atlantic states, any significant cold weather or lack thereof may contribute to price volatility. Also, hurricanes along the Gulf Coast can impact production at refineries located in that region or affect terminals receiving imports.

Refining – Any changes or disruptions to refinery production is worth noting including scheduled or unscheduled shutdowns.

Industry Reports – Like crude oil and gasoline, heating oil inventories can be of significance as any unexpected increases or decreases in supply may affect price. Volatility may also increase around the release of these reports, including the weekly API and EIA reports.

Environmental Concerns – Changes to or perceived issues regarding the emissions from residential oil burners may also be worth noting.

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