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How to Trade Low Sulphur Gasoil: ULSD Trading Guide

Date Modified: 23/05/2024

Low Sulphur Gasoil (G), also known as Diesel fuel, is the second-largest distillate of crude oil (CL), recognised for its wide array of applications from domestic to industrial usage. This article explains various aspects of diesel fuel, including its evolution into Ultra Low Sulphur Diesel (ULSD), the driving factors affecting its prices, and methods for speculating on its price fluctuations.

An illustration of Low Sulphur Gasoil prices

Main Points:

  • Low sulphur gasoil was initially known as "Heavier Fuel Oil". It gained prominence during the late 1800s following the invention of the diesel engine by German engineer Rudolf Diesel.
  • The enforcement of clean energy regulations prompted the significant reduction of sulphur levels in diesel fuel.
  • Factors affecting the price of low sulphur gasoil are crude oil prices, type of crude oil, supply and demand dynamics, refining costs, taxes, and distribution/marketing expenses.
  • The low sulphur gasoil CFD market operates continuously, providing round-the-clock trading opportunities, competitive spreads, and leverage.

What Is Low Sulphur Gasoil?

Gasoil or diesel fuel, traditionally known as heavy oil, is a fractional distillate of crude oil that accounts for about 25% of the total output obtained from a barrel of crude oil. It ranks as the second largest distillate trailing behind only petrol (gasoline) and is used for various purposes such as heating, and power generation for diesel engines in transportation vehicles and industrial machinery. However, due to harmful emissions from diesel fuel, its sulphur content was significantly reduced and is nowadays called “Low Sulphur Gasoil'' or “Ultra Low Sulphur Diesel” (ULSD).

The Origin and History of Low Sulphur Gasoil

In the process of refining crude oil, diesel fuel is separated as a fractional distillate at the temperature range of 180°C and 380°C. It was traditionally known as “Heavier Fuel Oil” and became of widespread use at the invention of the compression-ignition engine by German engineer Rudolf Diesel during the late 1800s. The engine would run more efficiently with “Heavier fuel oil” than it would on gasoline. Therefore, the engine and the fuel were named after the German engineer, the “diesel engine” and “diesel fuel”.

However, due to harmful emissions from diesel fuel, Congress passed the Clean Air Act in 1970 and continued demanding stricter emission reductions.

Initiatives like the Heavy-Duty Highway Diesel Programme were proponents of advanced emission control technologies in new highway diesel engines which ultimately led to the regulation of sulphur levels in diesel fuel.

By June 2006, there had been a significant reduction in the sulphur content of diesel fuel used for highway vehicles, dropping from 500 parts per million (ppm) to 15 ppm. Off-road diesel fuel also saw a significant reduction from 3,000 ppm to 500 ppm, and then finally matched on-road standards in 2010, reaching the 15 ppm level. In 2014, this revolutionary fuel, known as “Ultra-Low Sulphur Diesel (ULSD)” became the standard for diesel engines.

What Are the Benefits of Low Sulphur Gasoil

The advantages of significant reduction of sulphur content in diesel fuel are as follows:

  1. Cost Efficiency
    Ultra-low sulphur diesel may appear to have a higher price tag per litre when compared to traditional heating oils, but its economic advantage becomes apparent when acquired in bulk quantities. For instance, a single tank filled with ultra-low sulphur diesel outperforms natural gas in efficiency by about 40 per cent.

  2. Improved Safety
    Unlike some traditional heating fuels that pose the risk of explosion, low sulphur gasoil is considered safe and stable because it doesn’t combust in storage systems. Additionally, there is improved safety due to prompt indication of any potential hazard within the heating systems.

  3. Mild Environmental Impact
    Ultra-low sulphur diesel stands out as a better environmental choice due to its minimal particulate emissions during combustion. With just 15 parts per million of sulphur content, it significantly outperforms traditional heating oil, which can contain up to 4,000 parts per million of sulphur content. This translates to a substantial reduction in environmental impact, with nitrous oxide emissions lowered by 10% and sulphur dioxide emissions lowered by 75%.

  4. Prolonged Equipment Lifespan
    With less residue buildup as a result of low sulphur levels, heating systems have — cleaner internal components, require fewer professional interventions and have prolonged longevity.

  5. Easy Transition
    The compatibility of ultra-low sulphur diesel with existing heating systems reduces conversion expenses or costly equipment upgrades. This makes it easy to transition heating systems to low sulphur gasoil.

Challenges of Low Sulphur Gasoil

Despite the significant benefits of low sulphur in diesel, there are some disadvantages associated with the adoption of low sulphur gasoil. These are as follows:

  1. Production
    The process of removing sulphur from diesel is beneficial for environmental purposes but increases production costs and impacts the economics of fuel refinement.

  2. Lubricity
    The removal of sulphur from diesel fuel using severe hydrotreating reduces its natural lubricity which can lead to engine wear and higher maintenance and repair costs.

  3. Efficiency
    Reduced sulphur can lower the energy density of diesel which may lead to fewer miles per litre.

  4. Corrosion
    Not only does low sulphur gasoil have a high affinity for water which can lead to tank corrosion. The transportation of ethanol-based gasoline and ultra-low sulphur diesel in the same tanker trucks can also accelerate storage tank corrosion.

Factors Affecting the Price of Low Sulphur Gasoil

Some driving factors influencing the price fluctuations of ultra-low sulphur diesel (ULSD) are as follows:

  1. Crude Oil Price
    Changes in the prices of crude oil are the single biggest factor affecting the cost of low sulphur gasoil. Since ULSD is refined from crude oil, fluctuations in global crude oil prices directly impact the cost of ULSD.

  2. Type of Crude Oil
    An economy’s crude oil refining process is largely dependent on the kind of crude oil they have available. It's easier to use light crude oil to manufacture ULSD because it contains less sulphur than its counterpart, heavy crude oil. However, due to the scarcity of light crude oil, ULSD trades at a premium price.

  3. Supply and Demand
    Gasoline (petrol) and ULSD (diesel) comprise most of the crude oil refined outputs. Production of either petrol or diesel would be greater than the other based on demand and economic needs. For example, the refining infrastructure within the United States is primarily designed to cater to the needs of the transportation sector.

  4. Refining Costs and Profits
    The complexity of removing sulphur to ultra-low levels increases refining costs, which are then reflected in the pump price.

  5. Taxes
    Federal and state taxes add a significant portion to the final price of ULSD. In the US, the federal excise tax on diesel fuel is higher than on gasoline.

  6. Distribution and Marketing
    The costs associated with marketing and the transportation of ULSD from refineries to retailers also contribute to the final price consumers pay at the pump.

How to View the Live Price of Ultra Low Sulphur Diesel

The market value of ultra-low sulphur diesel (ULSD) is reflected in its futures contract’s price. It is determined by the transactions of both hedgers, who use futures contracts to manage risk, and large speculators, who trade based on anticipated market movements.

You can gain real-time insights into the price fluctuations of ultra-low sulphur diesel (ULSD) by utilising the Plus500 CFD app or web trader platform. Besides observing the price fluctuations, you can also monitor overall buyers' and sellers' sentiment of Plus500 traders, see relevant up-to-date news and speculate on the CFD derivative of the ULSD futures price.

Understanding Low Sulphur Gasoil Futures Price

The pricing for low sulphur gasoil future contracts is directly tied to the physical deliveries of diesel barges in the ARA region, encompassing Amsterdam, Rotterdam, Antwerp, Vlissingen, and Ghent.

Trading of the low sulphur gasoil futures contracts takes place on either the Intercontinental Exchange (ICE) or the New York Mercantile Exchange (NYMEX) but the ICE Low Sulphur Gasoil Future price serves as the benchmark for all gasoil trading in Europe and beyond.

On the Intercontinental Exchange, traders can engage in buying or selling ULSD future contracts. These contracts outline specific details such as the quantity, quality, and delivery date of ULSD.

The majority of market participants involved in trading ULSD futures are investors and organisations with exposure to the underlying physical market. These market participants, from exploration and production companies to refining and manufacturing businesses, utilise the futures market as a financial tool to lock in prices for future deliveries and hedge against uncertainties.

How to Trade Low Sulphur Gasoil CFDs

Unlike futures trading, Contracts for Differences (CFDs) are derivative instruments. They do not require ownership of the underlying asset and they allow traders around the world to enter and exit positions on smaller contracts with lower margin requirements, since they are leveraged instruments.

In the context of trading low sulphur gasoil CFDs, you do not own the underlying asset. Instead, you open buy or sell trades to make profits or losses from the difference between the price of ULSD when you enter the market and when you exit the market.

CFD trading allows the use of leverage which could amplify potential profits from minor price fluctuations, but which also poses risks of substantial losses.

Steps to Buy and Sell Low Sulphur Gasoil CFDs

You can follow these steps to start trading low sulphur gasoil CFDs with Plus500:

  1. Sign up for a real or demo trading account.
  2. Log into the Plus500 app or webtrader platform.
  3. Locate ‘Low Sulphur Gasoil’ among the ‘All Commodities’ instruments category.
  4. Analyse the low sulphur gasoil live price.
  5. Decide to go long or short on the low sulphur gasoil CFDs.
  6. Adjust your contract size and risk management like stop-loss (close at loss order), take-profit (close at profit order), or trailing stop orders.
  7. Lastly, click "Buy" or "Sell" to confirm your trade.

What Are the Trading Hours for Low Sulphur Gasoil CFDs

The low sulphur gasoil CFD market provides round-the-clock availability to gain exposure to the price fluctuations of low sulphur gasoil across various time zones.
You can trade the low sulphur gasoil CFDs and monitor the price movement on the Plus500 app or WebTrader platform. Generally, low sulphur gasoil trading is accessible on the trading platforms, starting Sunday at 22:00 GMT until Friday at 22:00 GMT. However, trading platforms, trading hours and choice of instruments are subject to each operator.

Why Trade Low Sulphur Gasoil CFDs with Plus500

Flexibility: Plus500's user-friendly platform lets you trade low sulphur gasoil CFDs, anywhere on your desktop, or phone (iOS/Android).

Advanced Trading Tools: You can get an overall picture of the ULSD price movement and make informed trading choices using Plus500's advanced charts, technical indicators, and economic calendars.

Swift & Reliable Execution: Plus500 ensures fast and reliable order execution, to ensure that your orders are filled at your exact entry and exit prices.

Competitive Spreads: Plus500 offers competitive spreads on the ULSD CFDs. Remember, other fees may still apply.

Leverage: Leverage offers the potential to amplify returns, but be aware that it also exposes you to the risk of magnified losses.

Conclusion

This article explores low sulphur gasoil, a cleaner version of the traditional diesel fuel. It is a byproduct of crude oil refining and has emerged as a more efficient fuel source for compression-ignition engines since the late 1800s.

The primary motivation for low sulphur gasoil's development was to address the harmful emissions associated with traditional diesel. By significantly reducing sulphur content, ULSD offers environmental benefits but also presents challenges to consider like production costs, reduced lubricity and maintenance cost.

Several factors like crude oil, refining cost, taxes, hedging and speculation in the futures market influence the price of ULSD and create ground for potential trading opportunities. Therefore, a thorough understanding of ULSD market drivers and effective trading strategies may assist traders in Low Sulphur Gasoil CFDs trading, keeping in mind that it can be complex and carries inherent risk.

Frequently Asked Questions

How Can Open Interest Be Helpful for Trading Low Sulphur Gasoil?

Open interest acts as a real-time indicator of market sentiment and potential trends. It refers to the total number of ULSD future contracts currently held by traders that haven't been closed or expired.

What Is the ICE Low Sulphur Gasoil Future Contracts?

The ICE Low Sulphur Gasoil futures contract is a leading benchmark for trading ultra-low sulphur diesel (ULSD) in Europe and globally. It allows companies involved in the oil industry (refiners, consumers, traders) and investors to manage price risks associated with low sulphur gasoil.

Why Is the ICE Low Sulphur Gasoil Future Contracts Important?

Similar to how ICE Brent Crude sets the global standard for crude oil, the ICE ULSD Future contracts serve as the benchmark price setter for low sulphur gasoil in Europe and around the world. This centralised system fosters transparent trading and efficient risk management for market participants across various locations.

Learn More About Low Sulphur Gasoil

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