Heating oil (HO) was the first successful energy futures contract. It started trading in 1978 and its price seasonality has been steady and helpful for those that offer customers fixed- or maximum purchase programs.
The specifications have changed several times but the HO symbol remains the same, recognizing its historical roots. It is formally named Ultra Low Sulfur Diesel (ULSD).
The demand for ULSD for home heating depends largely on the weather. As temperatures fall, demand rises and probably price as well. “Probably” because of the impact of things like crude oil supply, the capacity of refineries, and a variety of geopolitical events could affect the price as well.
When HO began trading, the futures contract was the only financial instrument available for hedging. The trader now has many related exchange-traded instruments to use including TAS (Trading at Settlement) and financially settled variants on the core contract; options contracts based on HO contracts; and it is also now possible to hedge as little as one gallon with over-the-counter instruments. Many strategies have developed using futures, options on futures, or OTC.
Cap Programs: Use options contracts to guarantee a not-to-exceed price for the winter that maintains access to lower prices if fuel prices fall.
Hedge Physical Inventory and Future Sales: Use the various contracts to manage (and more accurately predict) your margins on held inventory and forward sales.
POWERHOUSE has been helping clients develop and implement similar strategies for nearly 40 years. Contact us to explore strategies that can work for you.