Futures Measures

Trading Energy Commodities With Winter Approaching | Part 1

| Aug 20, 2015
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    Futures Measures

    Trading Energy Commodities With Winter Approaching | Part 1

    Aug 20, 2015

    As we’ve seen over the last year, crude oil can be a very volatile commodity. Because of the wild swings in one direction or the other, a trader must be correct on price direction as well as timing the entrance into the market if they want to find success trading crude oil futures.

    Trading the products that are ‘cracked’ from crude (you can learn more about the cracking process here), such as heating oil (/HO) and gasoline (/RB), allows a trader to take advantage of the volatility brought about by crude oil prices while incorporating seasonal strategies (like intermarket spreads) into their portfolio. This doesn’t leave a trader as exposed to the large swings in the price of crude.

    As with all commodities, the price of gasoline and heating oil are dictated by demand. There is more demand for gasoline during the summer when there are more drivers on the road and more demand for heating oil in the winter months. Refiners also play an important role in the demand for heating oil and gasoline and will sometimes overproduce/underproduce depending on the input costs at different times throughout the year.

    Here are the correlations between gasoline and heating oil…

    Heating Oil (/HO) To RBOB (/RB) Correlations
    1 Month: +0.72
    3 Month: +0.78
    6 Month: +0.79

    Despite the two products being closely correlated, gasoline prices are typically higher than heating oil prices, although the seasonality of the two products would impact the spread. When the economy is expanding, heating oil will trade at a premium to gasoline due to the refining rates.

    As winter rolls around, the refiners will operate at full capacity and build up inventories of heating oil. They do this in the summer and fall so that when consumption is building towards a peak, supply is plentiful. As the new calendar year hits, refiners will aggressively get rid of their supply to minimize the inventory that they are holding when the ‘heating season’ ends.

    Now that you understand the basics of the refined commodities, gasoline and heating oil, learn how we would set up a trade to take advantage in price differentials between the products by watching part 2.

    Strategies: N/A
    Products Discussed In This Episode: /HO, /RB

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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