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How to Trade Heating Oil: HO Trading Guide

Date Modified: 21/04/2024

Among the several byproducts of crude oil (CL) serving various purposes domestically, in industrial applications, and global finance, heating oil (HO), also known as kerosene oil, has been the second most widely used petroleum product.

An illustration of an oil barrel

Main Points:

  • In addition to domestic and industrial usage, heating oil is used for speculative purposes, as a hedge against energy costs, and for portfolio diversification.
  • Factors affecting crude oil prices, such as OPEC meetings, inflation, supply, and demand, have a significant impact on heating oil prices.
  • Heating Oil can be traded as a futures contract, options contracts, or Contracts for Differences (CFDs).
  • With Plus500, traders can speculate on financial instruments that provide exposure to heating oil by trading Contracts for Differences on heating oil CFDs, heating oil-related share CFDs*, and heating oil ETF CFDs*.

What Is Heating Oil?

Heating oil is one of the viscous-liquid products derived from petroleum distillation. Among the other by-products of crude oil, Heating oil is the second most important product heavily used worldwide and second only to petrol also known as gasoline (RB). It has some similarities with diesel in terms of properties but vary in chemical composition.

Since its early years, it has been called home heating oil (HHO) because it served as a primary source of energy for household usage like lighting lanterns and cooking using stoves. It has evolved to offer two distinct variants, one for households and the other designed for industrial applications.

Heating oil, as known in the US and UK, is commonly referred to as 'Red Diesel' in the UK due to similarities with diesel in terms of its properties and applications. Meanwhile, in Asian nations, it is commonly known as Kerosene oil.

What Are the Uses of Heating Oil?

Heating Oil as an Alternative Fuel Source:

In the northeastern United States and specific parts of the United Kingdom, heating oil becomes a preferred choice for homes and businesses when other options like natural gas, diesel fuel, gasoline, and propane are either too expensive or not easily accessible.

Heating Oil for Domestic Use:

In regions where access to electricity may be limited or unreliable, heating oil is used as a backup source of energy. For instance, in households, heating oil is frequently used for lighting and cooking purposes.

Heating Oil for Industrial Use:

Beyond heating homes, heating oil serves various industrial purposes. For Industrial purposes, heating oil is often used for power generation in facilities where electricity is produced, such as power plants. It also has direct heating applications for commercial usage such as space heating or water heating equipment.

Heating Oil as a Hedge Against Winter Cost:

Individuals who live in cold areas and rely on heating oil to keep their homes warm during winter may buy heating oil to hedge against potential increases in cost. This way, they can manage the risk of having to pay more for heating their homes during the cold season.

Heating Oil for Portfolio Diversification:

It is a common theme for traders and investors to allocate most of their capital to stocks and bonds. Adding energy commodities like heating oil to investment and trading portfolios can be a strategic means of risk diversification.

Since commodities tend to behave differently from the forex market, stocks, and bonds, their addition can help to reduce the risk of fund allocation to similar asset classes. So, by trading heating oil along with other assets, traders can make their portfolios more diversified, thereby reducing risk exposure to one asset class.

Factors Affecting Heating Oil Prices

Here are a variety of factors affecting the prices of heating oil:

Economic Impact on Heating Oil

The primary indicator associated with economic growth is Gross Domestic Product (GDP). During periods of strong economic growth, there is typically an increase in demand for crude oil. Since heating oil is derived from crude oil, an increase in demand for crude oil may contribute to higher prices of heating oil. Conversely, during economic downturns, demand for crude oil tends to decrease and may lead to lower heating oil prices.

Impact of the US Dollar on Heating Oil

The strength of the US Dollar also plays a key role in influencing heating oil prices. The prices of crude oil is known to have an inverse relationship with the US dollar. When the US dollar strengthens, crude oil prices tend to decrease, and heating oil prices may decline accordingly.

Geopolitical Impact on Heating Oil

Political events, particularly choices made by the Organization of the Petroleum Exporting Countries (OPEC), can have a significant impact on heating oil prices. OPEC's decisions to increase or decrease oil production can directly influence global oil supply and, consequently, the prices of heating oil.

Impact of Alternative Energy on Heating Oil

The cost, competition, and availability of alternative heating fuels like natural gas (NG), or alternative energy sources like solar or wind power can also affect the prices of heating oil. Natural gas, for example, is generally cheaper and its availability in regions that use heating oil may cause the prices of heating oil to decline. Secondly, increased demand for renewable energy can exert downward pressure on heating oil prices as consumers shift away from traditional fossil fuels.

Impact of Transportation Cost on Heating Oil

To meet the heightened demand for heating oil during peak periods, regions like the Northeast often resort to importing heating oil from other areas, such as Europe or the US Gulf Coast. However, transporting heating oil over long distances is costly and time-consuming, often taking weeks. This logistic challenge can contribute to price volatility and potential spikes in heating oil prices.

Impact of Seasonal Demand on Heating Oil

Demand for heating oil dwindles in warmer months when space heating is not required, leading to lower prices. In contrast, prices of heating oil tend to rise during colder months due to heightened demand.

The increase in demand for heating oil during winter is driven by the need for space heating in homes and businesses to combat the cold weather. Unexpected events, such as severe winter storms, can further exacerbate the seasonal demand for heating oil. These events can cause a sudden surge in demand, leading to price spikes as suppliers may struggle to meet the increased need for heating oil.

How to Trade Heating Oil

There are several financial instruments linked to heating oil prices, offering volatility and ample price swings for traders looking to speculate on its price movement. To gain exposure to the heating oil prices, traders may consider the following:

  • Trading Heating Oil Futures
  • Trading Heating Oil Options
  • Trading Heating Oil CFDs
  • Trading Heating Oil-related Shares
  • Trading Heating Oil ETFs

Trading Heating Oil Futures

Heating Oil Futures are derivative contract agreements often used by businesses to hedge against the rise or fall of heating oil prices. They buy or sell heating oil futures contracts measured in US barrels, at a set future date for a predetermined price.

In addition to businesses, speculators also play a crucial role in the futures market. These market participants engage in heating oil futures trading without the intention of taking physical delivery.

The expiration date for heating oil futures contracts is set for the concluding business day of the month leading to the subsequent delivery month. As the concluding business day of the month draws near, market participants may choose between receiving cash or physical delivery of the oil or rolling over positions to the next trading month.

Trading Heating Oil Options CFDs

Another way to speculate on the heating oil futures market is through option contracts. Heating oil option contracts are traded based on the price of their futures contracts. With call or put option CFDs*, traders and investors have the right, but not the obligation, to buy or sell heating oil futures at a strike price before the option expiration date.

Heating oil options contract expires three days earlier than the underlying futures contract. This allows traders to make decisions based on the option terms before the futures contract concludes.

Trading Heating Oil CFDs

‘HO’ is the ticker symbol representing the CFD derivative of the heating oil futures on the Plus500 WebTrader platform.

When you trade HO CFDs, you are trading Contracts for Differences (CFDs) based on heating oil futures prices. With CFDs, you can open a buy or sell position on heating oil to make a profit or loss from its price fluctuations without owning the heating oil or its futures contract.

Trading Heating Oil-Related Shares

It is also considerable to gain exposure to heating oil prices in the oil market by trading shares of multinational energy corporations involved in the extraction, refining, and sale of crude oil products and heating oil.

Although these companies are not exclusively focused on heating oil, the performance of their shares tends to be closely linked to the prices of refined crude oil products as well as heating oil.

By trading the share CFDs* of crude oil-related companies like Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), and TotalEnergies (TTE.PA), traders can indirectly gain some exposure to the rise and fall of heating oil prices.

Trading Heating Oil Exchange Traded Funds (ETFs)

Heating oil ETFs are financial instruments that trade on stock exchanges just like shares of multinational oil corporations. They provide an alternative means to gain exposure to heating oil prices.

The primary exchange-traded fund (ETF) directly linked with heating oil is the United States Diesel-Heating Oil Fund. Some other ETFs like the Energy Select Sector SPDR Fund (XLE) and United States Oil Fund, these ETFs offer broad exposure to the energy sectors, with differing proportions allocated to heating oil. Traders can get broad exposure to these heating oil ETF CFDs* on the Plus500 trading platform.

What Are Heating Oil Trading Hours?

You can engage in trading heating oil Contracts for Difference (CFDs) and monitor its real-time fluctuations using the Plus500 WebTrader platform. Generally speaking, heating oil trading is accessible on the trading platform every day between 00:00 and 23:00 CET (meaning there is only 1-hour break between 23:00 to 00:00 CET).

*Please note that trading platform hours depend on the individual operator.
*Availability subject to operator.

Steps to Buy or Sell Heating Oil CFDs with Plus500

To begin trading contracts for differences in heating oil, you can take the following steps:

  • Sign up for a CFD live or demo trading Account.
  • Login to the Plus500 WebTrader platform.
  • Select ‘Heating Oil’ from the ‘Commodities category’ in the instrument section.
  • Conduct market analysis on the Heating Oil (HO CFDs) market to decide when to buy (go long) or when to sell (go short).
  • Input the contract size (position size) you wish to trade.
  • Input your risk management parameters.
  • Click the "Buy" button to buy or the "Sell" button to sell.

Why Trade Heating Oil with Plus500

  • Leverage: When trading heating oil, traders and investors can utilize leverage to maximize gains in both buy and sell positions. However, it is important to note that leveraged positions pose a risk of losing significant amounts of capital.

  • Accessibility: Heating oil can be traded on desktop computers, iOS, and Android devices from anywhere by using the Plus500 WebTrader.

  • Swift Order Execution: Due to high liquidity, heating oil offers fast and reliable order execution, ensuring that traders can open and close trade positions at their desired prices without delays.

  • Market Analysis: Traders can leverage on our analytical tools to make informed decisions. Tools like technical indicators, chart types, economic calendars and trading alerts.

  • Competitive Pricing: Heating oil trading typically involves competitive pricing, with tight spreads but traders should be aware of any additional fees that may apply during trading activities.

Conclusion

This article has offered a thorough understanding of heating oil, exploring its applications, the factors influencing it, and the range of trading options available. Whatever your preference—be it trading heating oil CFDs, heating oil ETFs, or engaging with heating oil-related shares. It is vital to perform a comprehensive market analysis and implement effective risk management practices. By carefully considering your risk tolerance, you can make informed decisions and speculate on the price fluctuations of heating oil while aligning your trading activities with your financial objectives.

FAQs

What external factors can heavily affect heating oil prices?

Natural disasters like hurricanes, production stoppages due to evacuations, and factors such as taxes and supply issues can significantly impact heating oil prices.

What is a short hedge in the context of heating oil prices?

A short hedge is a strategy used by producers to set a fixed selling price for heating oil in a contract, to reduce the risk of price fluctuations.

Which countries play a significant role in refining heating oil?

At the forefront of heating oil production and consumption is the United States, including China and Japan, also making substantial contributions to refining.

Who is the leading consumer of heating oil globally?

The United States is the largest consumer of heating oil worldwide with notable consumption from Europe and Canada.

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