Heating Oil Futures Trading Strategy – Rules, Setup, Backtest, and Returns Analysis
Heating oil is a low-viscosity liquid produced from refining crude oil, which is used almost exclusively for heating residential and commercial buildings. The demand for heating oil rises as the temperature drops during the winter, which makes it a highly seasonal commodity. Trading on some futures exchanges, heating oil provides opportunities for speculation and hedging. But what is a heating oil futures trading strategy?
A heating oil futures strategy refers to the methodologies and techniques you can use to profitably trade heating oil futures contracts. Heating oil futures refer to a financial derivative product that represents a contract to buy or sell a specified quantity of heating oil on a future date, at a pre-agreed price. The contract trades on ICE Futures Europe and CME. A good heating oil futures strategy would include technical and fundamental analyses of the heating futures market, as well as risk management methods.
In this post, we answer some questions about the Heating Oil futures strategy and we also make a backtest.
Related reading: – Looking for a potential futures trading strategy? (We have hundreds)
What are Heating Oil futures?
Heating oil is the second-largest product derived from crude oil, after gasoline, as about 25 percent of a barrel of crude oil goes into its production. Despite being classified as a hazardous material by environmentalists and state legislatures, heating oil is still being used by a lot of households who don’t have access to natural gas to heat their homes during winter. This is why heating oil futures are still very much actively traded on some futures exchanges.
Heating oil futures refer to a financial derivative product that represents a contract to buy or sell a specified quantity of heating oil on a future date, at a pre-agreed price. The contract trades on ICE Futures Europe where it is cash-settled. It also trades on CME where it is deliverable. Heating oil futures provide opportunities for industry stakeholders to hedge their risk exposure in the market and allow traders to profit from speculating on price fluctuations.
What is a Heating Oil futures strategy?
A heating oil futures strategy refers to the methodologies and techniques you can use to profitably trade heating oil futures contracts. It refers to the technical and fundamental analyses traders perform to time the heating futures market, as well as the techniques for position sizing and other risk management methods.
To succeed in trading the coffee futures market, you will need a robust trading strategy that offers precise entry and exit signals.
Heating Oil futures strategy backtest
Heating oil is far from the most traded futures contract, but it might offer valuable diversification if it complements other strategies you might have.
Trading Rules
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We backtested the trading strategy in TradeStation (we use that and Amibroker), and we got the following equity curve:
The 168 trades returned an average of USD 370 per trade, a profit factor of 2.02, and a win rate of 59%.
What is the seasonality of Heating Oil futures?
Surprisingly, heating oil tends to perform better between February and August than during the main months of the winter period. According to Equity Clock, with a buy date of January 11 and a sell date of August 30, investors would have yielded a total return of 361.83% over the 10 years between 1999 and 2009. And that trend doesn’t seem to change any time soon, as you can see in the chart below. One of the reasons for heating oil futures performs much better before the winter months is that people buy ahead of the winter period.
What moves the Heating Oil — What affects the Heating Oil the most?
The factors that move the heating oil market include
- Weather: Heating oil is purely used for heating homes. As such, its demand rises as the temperature drops. In fact, heating oil is one of the most seasonally affected of all the commodities trading in the futures market.
- The price of crude oil: Heating oil is derived from crude oil, so when crude oil prices rise, the supply of heating oil might decline, leading to higher prices.
- The capacity of oil refineries: When refineries are used to capacity in producing gasoline, heating oil availability drops, and the price rises.
- The price of alternative heating fuels: Natural gas is a safer fuel for household heating. When it is available and cheap, the demand for heating oil drops.
How are Heating Oil futures traded?
Heating oil futures contracts are traded on ICE Futures Europe and CME Group’s Globex platform.
On the ICE futures exchange, heating oil (with the trading symbol, UHO) trades from 1:00 AM – 11:00 PM London Time every trading day, from Sunday (11: 00 PM) to Friday. There is a pre-Open market from 12:45 AM. The contract size is 42,000 gallons or 1,000 barrels. It is cash-settled.
On the CME Globex platform, each Heating Oil futures contract (HO) represents 42,000 gallons of heating oil with a minimum price fluctuation of $.0001 per gallon, or $4.20 per contract. The contract trades Sunday-Friday from 5 p.m. to 4 p.m. Central Time (CT), with a daily 60-minute break at 4 p.m. CT. Settlement is by physical delivery, and trading terminates on the last business day of the month prior to the contract month.
How do you start trading Heating Oil futures?
To trade the contract, you need a futures broker that will grant you access to the exchanges where coffee futures contracts are traded. The first step is to register with a futures broker, such as TradeStation, and fund your account.
However, if you just want to speculate on price movements, you may trade the CFD of heating oil futures contracts via an online CFD broker, such as IG. With CFD, you can speculate on price fluctuations without having to worry about the rigors of asset delivery or contract expiry.
What is Heating Oil trading at?
As of writing, heating oil futures (UHO) were trading at $3.388 on ICE Futures Europe. On CME’s Globex platform, heating oil futures (HO) were trading at $3.4135 per gallon.
As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or from TradingView, click either of those links.
What’s Heating Oil futures hour?
It depends on the exchange: On the ICE futures exchange, heating oil contracts trade from 1:00 AM – 11:00 PM London Time every trading day, from Sunday (11: 00 PM) to Friday. There is a pre-Open market from 12:45 AM.
On the CME Globex electronic platform, heating oil futures trade Sundays to Fridays, from 5:00 p.m. to 4:00 p.m. CT the next day. There is a 60-minute break before the start of the next trading day (4:00 p.m. – 5:00 p.m. CT) from Monday to Thursday.
Where can I find trading charts?
You can get the chart on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts.
There is also TradingView, which offers free access to charts of different instruments. However, to connect to your broker, you have to subscribe to the Pro services. You can also access the chart from the CME platform.
What are the trading symbols for Heating Oil futures?
The trading symbol for heating oil futures on ICE Futures Europe is UHO, while the trading symbol on the CME Globex platform is HO.
What is the specification for the Heating Oil futures contract?
On both ICE and CME, one contract of heating oil futures is equivalent to 42,000 gallons or 1,000 barrels. The price quotation is in US dollars and cents per gallon. The minimum fluctuation is one-hundredth of one cent ($0.0001) per gallon or $4.20 per contract.
There are monthly contracts listed for the current year and the next 3 calendar years and 1 additional month. On ICE, they can be up to 50 consecutive months. The contract is financially settled on ICE, but settlement is by physical delivery on CME. The last trading day is on the last business day of the month prior to the contract month.
Why should you start trading Heating Oil futures?
Heating oil futures allow you to speculate on the day-to-day fluctuations in heating oil prices. You can also use a different trading strategy, such as arbitrage trading between two different exchanges or platforms to profit from price discrepancies.
To succeed in trading we believe you need to diversify to as many assets, markets, time frames, and market directions as possible. As such, we believe heating oil might be a valuable addition to a portfolio of strategies.
For the producers and consumers, heating oil futures offers them the ability to hedge the risk of future market fluctuations on their businesses.
What is the contract size?
One contract of heating oil futures is equivalent to 42,000 gallons of heating oil on both CME and ICE exchanges. With the price of a gallon, as of writing, at $3.4135, the USD worth of a full contract of heating oil is 42,000 x $3.4135 = $143,367.
What is the tick size?
The tick size of one full contract of heating oil futures is $4.20 per tick per contract.
What is the minimum price fluctuation for Heating Oil futures?
The minimum fluctuation is one-hundredth of one cent ($0.0001) per gallon
Are there any ETFs?
Yes, an ETF that tracks the heating oil market is the HEAT Exchange-Traded Fund (ETF) provided by WisdomTree. The fund is built to track an index: Bloomberg Heating Oil Subindex Total Return – USD. You can use it to diversify your investments into the heating oil market.
What factors affect Heating Oil prices?
They include the following:
- Weather: Heating oil demand rises as the temperature drops (winter) and reduces when the temperature rises (summer).
- The price of crude oil: When crude oil prices rise, the supply of heating oil might decline, leading to higher prices.
- The capacity of oil refineries: When refineries are used to capacity in producing gasoline, there would be less capacity for producing heating oil, leading to higher prices.
- The price of alternative heating fuels: When natural gas is available and cheap, the demand for heating oil drops.
What is the all-time high for Heating Oil futures?
According to the TradingView chart for heating oil futures (HO), the all-time high for the contract is $5.2215 which was reached in April 2022.
What are the biggest risks in trading Heating Oil futures?
When trading any type of futures, including heating oil contracts, the biggest risk comes from adverse price movement. Given that futures contracts are leveraged, adverse price movements can lead to huge losses. For example, if you trade with a 20x leverage, a 1% negative movement results in a 20% loss in your account, and a 5% adverse price move would wipe out your account completely.
What is the settlement method?
The settlement method depends on the exchange you trade with. On the CME Globex platform, heating oil contracts are settled by physical delivery, but on ICE Futures Europe, the contracts are financially settled.
What is the settlement procedure?
There is the usual daily settlement based on the price movement for each day, and this is the same for both exchanges. For the final settlement at contract expiry, ICE Futures Europe ensures cash settlement, while CME supervises the delivery of the specified amount of heating oil by the seller.
What is the block minimum for Heating Oil futures?
25 contracts
What is the difference between Heating Oil futures and the Forex instrument for Heating Oil?
Heating oil futures trade on regulated futures exchanges, while the CFD instruments offered by online CFD brokers are just a contract between the trader and the broker. However, while futures have expiry dates and may involve the delivery of the asset, CFDs can be traded without such worries.
Which forex instrument is the same as Heating Oil futures
Heating Oil CFDs; they are offered by some online Forex and CFD brokers like IG.
What are some important dates for this market?
Some of the important dates for the heating oil market include:
- November 1978 when heating oil futures contracts made their debut
- February 1999 when heating oil futures made its all-time low
- April 2022 when the all-time high was reached
What is the highest Heating Oil has ever been — its all-time high?
According to the TradingView chart for heating oil futures (HO), the highest price heating oil has ever reached was $5.2215 per gallon. This price was reached in April 2022.
What is the lowest Heating Oil has ever been — its all-time low?
According to the TradingView chart for heating oil futures (HO), the all-time low for heating oil futures is $0.2920 per gallon. This price was reached in February 1999.
FAQ:
Why is Heating Oil considered a highly seasonal commodity?
Heating oil exhibits seasonality due to its increased demand during colder months. As temperatures drop in winter, households and businesses rely on heating oil for warmth, leading to heightened demand during this season.
What is the significance of backtesting in a Heating Oil futures strategy?
Backtesting involves evaluating a trading strategy’s historical performance. In the context of heating oil futures, backtesting provides insights into how a specific strategy would have performed in past market conditions. It helps traders assess the strategy’s effectiveness and refine it for future use.
What factors influence Heating Oil prices, and how do they impact the market?
Several factors impact heating oil prices, including weather conditions, crude oil prices, refinery capacity, and the cost of alternative heating fuels. For instance, colder weather increases demand, while rising crude oil prices may reduce the supply of heating oil, leading to price fluctuations.