Heating oil is a type of flammable fuel, commonly used in portable heaters and boilers. It is a refined by-product of crude oil, formed when crude oil is broken down and its constituent parts are separated. Heating oil gained popularity in the 1920s with the invention of the oil burner, which replaced coal as the primary method of heating the home. Coal had several attributes that made it less than ideal as a fuel for the home: it was messy, it required significant effort by the home-owner to be used efficiently and more importantly, it was prohibitively expensive. Heating oil was a much more attractive alternative as it was cleaner, cheaper and easier to use. Heating oil is still used today, and heating oil futures are heavily traded, leading to opportunities for profit for the savvy trader.
Heating oil is valuable as a commodity for a number of reasons. Perhaps the most important factor to consider when embarking upon heating oil trading for either futures or options is that the many homes that have no access to natural gas heating supplies rely solely on heating oil to provide heat during the winter months. This essentially produces a captive market. There are approximately 8.1 million homes in the US that are believed to rely on heating oil as their only source of heating, and so each winter there will always be a heavy demand for the product. Those trading in heating oil futures and options will attempt to capitalise on this yearly window of opportunity, planning strategies for trading accordingly. Experienced heating oil traders will keep track of weather patterns that may affect heating oil prices, and plan their trades around them.
Heating oil trading occurs on several commodity exchanges, with the most notable being the Intercontinental Exchange (ICE), the New York Mercantile Exchange (NYMEX) and the Multi Commodity Exchange (MCX) of Mumbai. A variety of contract codes are used, with the code O used for trades on the Intercontinental Exchange, HO used on the New York Mercantile Exchange, and HEATING OIL used on the Multi Commodity Exchange.
The main consumer markets for heating oil are the domestic market in Ireland, where there is no consistent gas supply network, and the domestic market in the North East United States, which suffers from the same problem. It is also used to heat some households in the UK, but the market there is much smaller. The US is believed to produce about 85% of its own heating oil, and imports the remaining 15% from Canada, the Virgin Islands and Venezuela.
There are several factors to consider with regard to heating oil prices. Heating oil trading is, as mentioned previously, a very seasonal affair, with demand being its highest just before the winter months. Heating oil prices obviously increase in these times accordingly. Mild winters can, however, lower the perceived demand for heating oil and thus the price of heating oil options will decrease as well. The heating oil market is also intrinsically linked with the crude oil market, as heating oil is a direct by-product of crude oil. This can mean that as oil prices increase, so does the heating oil price. Furthermore, as there have been no new oil refineries built in the US for the last 3 decades, only so much heating oil can be produced each year, and this amount will decrease as refineries shift their attentions to the increased demand for gasoline. Also, if new methods are found to heat the homes that have the greatest need for heating oil, then the price of heating oil futures will drop considerably.
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