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Understanding Winter Seasonality of Heating Oil Futures Prices

| August 31, 2021 | By

On the Chicago Mercantile Exchange (CME), energies play a pivotal role in daily trade. It doesn’t matter whether you’re an institutional hedger or retail speculator, the odds are good that there’s an ideal CME contract well-suited for your needs.

The global energy complex is a dynamic atmosphere, featuring a lineup of exciting products. From the CME’s benchmark West Texas Intermediate (WTI) crude oil contract to NY Harbor ULSD heating oil, opportunity is always afoot. Let’s dive deeper into what the NY Harbor ULSD contract is, its functionality, and a few key drivers of heating oil futures prices. 

What Are NY Harbor ULSD Heating Oil Futures?

There are two types of energy futures contracts listed for trade on the CME: commodity and refined. Featuring WTI crude oil (CL) and Henry Hub natural gas (NG), commodity futures are the more popular of the two. However, New York Harbor Ultra-Low Sulfur Diesel (NY Harbor ULSD, HO) and Reformulated Blendstock for Oxygenate Blending gasoline (RBOB, RB) are refined contracts vital to global commerce.

Technically listed on the NYMEX, a division of the CME Group, NY Harbor ULSD heating oil is a multipurpose refined diesel fuel. Primary uses for NY Harbor ULSD are as fuel for transportation and home heating.

Since 2010, NY Harbor ULSD has been the standard for U.S. highway diesel fuel. Also, it’s easily adaptable to home heating. The “NY Harbor” aspect of the product’s description refers to physical distribution centers located in New York Harbor. The location of these hubs makes New York a key locale in the ULSD cash market.

To capitalize on heating oil futures prices, understanding the following specs for CME NY Harbor ULSD is a must:

Symbol HO
Size 42,000 gallons
Quotation U.S. dollars and cents
Minimum Tick $0.0001 per gallon
Tick Value $4.20 per tick
Expiration Monthly
Settlement Physical Delivery

In addition to these specs, it’s worth noting that HO daily volumes regularly exceeded 170,000 traded contracts per month in 2019. The steady volumes are attributable to the HO contract being engaged by traders in 94 different countries.   

Seasonal Trends in NY Harbor ULSD Heating Oil Futures Prices

Perhaps the single greatest underpinning of commodities and commodity-based asset prices is the relationship between supply and demand. Although the supply-demand dichotomy can be extremely complex, it boils down to this: When demand increases, prices rise; when supplies increase, prices fall. NY Harbor ULSD heating oil futures prices are no different ― when consumption spikes, so does the price.

Traditionally, the seasonality of HO runs contrary to that of other energies, such as WTI crude oil and RBOB gasoline. According to the U.S. Energy Information Agency (EIA), heating oil futures prices trend upward from October through March. The reason for this is simple ― increased demand. In fact, the EIA estimates that a homeowner in the Northeast burns between 850 gallons to 1,200 gallons of heating oil in a typical winter, while burning little to none the remainder of the year. Given the uptick in demand, HO prices cycle up in the fall and winter before falling in the spring and summer.

In addition to seasonality, heating oil futures prices hinge on these two broad market drivers:

  • Crude oil prices: Heating oil is a crude oil derivative. Thus, when the prices of crude oil rise, heating oil follows suit.
  • USD strength: The relative strength of the U.S. dollar (USD) impacts commodity-based products across the board. When the USD strengthens, both crude oil and heating oil futures prices tend to retreat. 

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