Risk Warning: Your Capital is at Risk.
Heating oil can be traded in a variety of ways. In this guide, we’ll explain how to trade this resource and where you can find regulated, reputable brokers in .
In a hurry? If you want to get started trading heating oil, here are broker platforms available in to consider:
Disclaimer: Availability subject to regulations.
Between 74-89% of retail investor accounts lose money when trading CFDs.
Read on to learn about the potential advantages and pitfalls of trading heating oil.
Why Do People Trade Heating Oil?
Here is a brief overview of three commonly cited reasons people are interested in trading heating oil.
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Hedging Oil Hedging For Cold Winter Costs
People who live in cold climates and use heating oil to heat their homes may want to trade the commodity in advance of the winter months.
Some may find that using a heating oil trade to protect against the cost of winter utility bills may be a sensible risk mitigation strategy.
Growth Speculation On Heating Oil Prices
Trading heating oil also provides a way to bet on global economic growth. As emerging markets expand, many analysts believe that fossil fuel demand will outstrip supply and lead prices higher.
Also, newly developed areas often lack natural gas infrastructure and need heating oil as a source of fuel.
Heating Oil For Portfolio Diversification
Heating oil may be a viable way to diversify a trading portfolio. Most traders have assets heavily concentrated in equity and fixed income markets.
Commodities provide diversification as they generally have low correlations with stocks and bonds.
Risks Of Trading Heating Oil
All trades carry the possibility of losses, so traders should consider the risks of speculating on heating oil prices.
Some risks include:
- Warmer than average weather could send prices lower.
- Strength in the US dollar could produce weakness in commodities prices including heating oil.
- Alternative sources of heating and technological advances in insulation materials could depress demand for heating oil.
Expert Opinions On Trading Heating Oil
Most experts agree that the price of heating oil is closely tied to both crude oil prices and refinery capacity.
See our Guide On Heating Oil As A Commodity to learn how crude oil is refined to produce heating oil. We also list the biggest oil refineries and oil storages worldwide.
In the view of many analysts, growing demand for crude oil combined with strains on refining capacity could drive heating oil prices higher.
Janet Kong, a senior executive of a multinational oil company, BP, believes that demand for distillates such as heating oil is driving higher global demand for crude oil. Other analysts concur with this view:
“The big surprise … has been on the distillate side, where it looks like we will hit 1.6 percent growth.”Matti Lehmus, Vice President of Oil Products at Neste Oil
Where to Trade Heating Oil?
If you are looking to get started trading heating oil or other commodities, here’s a list of regulated brokers available in to consider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Ways To Trade Heating Oil
There are several direct and indirect ways to trade heating oil:
Heating Oil Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Mgmt. Costs?||Leverage?||Regulated Exchange?|
|Heating Oil Futures||5||N||N||Y||N||Y||Y|
|Heating Oil Options||5||N||N||Y||N||Y||Y|
|Heating Oil ETFs||2||N||N||N||Y||N||Y|
|Heating Oil Shares||2||N||N||N||N||Y||Y|
|Heating Oil CFDs||3||N||N||N||N||Y||Y|
What Are Heating Oil Futures?
The New York Mercantile Exchange (NYMEX), a commodities and futures exchange operated by the Chicago Mercantile Exchange (CME), offers heating oil futures contracts.
One such CME contract settles into 42,000 gallons of heating oil per contract. The contract trades globally on the CME Globex electronic trading platform.
How Do Heating Oil Futures Work?
Futures are a derivative instrument through which investors make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.
Heating oil futures contracts expire on the last business day of the month preceding the delivery month.
At expiration, investors must either accept physical delivery of heating oil or roll their positions forward to the next trading month.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
How To Trade Heating Oil Options
The NYMEX offers an options contract on heating oil futures. Options are also a derivative instrument that employ leverage to invest in commodities.
As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An option succeeds if the heating oil price rises above the strike price by an amount greater than the premium paid for the contract. See our Options Trading Guide to learn more.
Therefore, options traders must be right about the size and timing of the move in heating oil futures to profit from their trades.
Heating oil options contracts expire three business days prior to the expiration of the underlying futures contract.
Understanding Heating Oil ETFs
These financial instruments trade as shares on exchanges in the same way that stocks do.
There is currently only one pure-play heating oil exchange-traded fund (ETF), which is The United States Diesel-Heating Oil Fund LP.
In addition, there are many ETFs that invest more broadly in the energy sector including popular funds like the PowerShares DB Energy Fund and the iPath Bloomberg Energy Total Return Sub-Index ETN.
Buying Heating Oil Company Shares
There are many companies engaged in extracting, refining, and selling crude oil and crude oil products.
While these companies are not pure-play investments in heating oil, the performance of their shares is correlated with crude oil and refined crude oil products.
Shares of oil companies also react to other factors including the performance of management and the stock market in general.
|Chinese oil and gas company based in Beijing||Shanghai (SSE), Hong Kong (SEHK), New York (NYSE), London (LSE)|
|British-Dutch multinational headquartered in The Netherlands||London (LSE), Amsterdam (Euronext), New York (NYSE)|
|Multinational oil company based in Saudi Arabia||Tadawul|
|Chinese oil company with headquarters in Beijing, China||Shanghai (SSE), Hong Kong (SEHK), New York (NYSE)|
|Headquartered in London but the USA houses the lion share of its operations||London (LSE), Frankfurt (FWB), New York (NYSE)|
|American multinational oil and gas corporation||New York (NYSE)|
How To Trade Heating Oil CFDs
One way to invest in heating oil is through the use of a contract-for-difference (CFD) derivative instrument.
CFDs allow investors to speculate on heating oil prices without purchasing ETFs, futures, options, or shares of oil companies.
IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.
The value of a CFD is the difference between the price of heating oil at the time of purchase and the current price. CFD traders, therefore, have direct economic exposure to the commodity.
If you’re curious to learn more about how heating oil is produced and what drives the commodity’s price, see our Heating Oil Commodity Guide.
To compare heating oil to other tradable commodities, see our guides on:
- How to trade crude oil with regulated brokers
- Ways to trade electricity online
- A guide to RBOB gasoline and why people trade it
Also see our guides on stock, CFD, options, and commodity brokers to find out which trading platforms are available in .