Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 13

Heating Oil

OVERVIEW

Heating oil, a heavy fuel oil, represents 25 percent of the yield from a barrel of oil. For this reason, heating oil is also known as Number two oil, second to gasoline, which represents about 50 percent of the yield from a barrel of oil. As is the case with gasoline, heating oil prices are closely correlated to those of crude oil.

About 8.1 million of the 107 million households rely on heating oil as their primary means of home heat, a number that reflects a significant decline over the past three decades as many households have turned to heating alternatives like natural gas. The American Petroleum Institute reports that demand for heating oil is down some 10 billion gallons per year from its 1979 peak. The Northeastern and Central Atlantic states are those most reliant on heating oil.

The United States produces about 85 percent of its heating oil. The rest is imported from Canada, the Virgin Islands, and Venezuela. Recent innovations in heating oil alternatives include substituting 20 percent of fuel oil with soybean oil, an additive that could save 1.3 billion gallons in fuel oil annually.

DEMAND

The biggest determinant of domestic heating oil demand is the weather. A rapid change to cold weather can deplete heating oil supplies more quickly than anticipated, putting pressure on refineries, delivery systems, and remaining supplies, which drives up prices.

Usage of U.S. distillate fuel oil rose 3.3 percent to a new record high of 4.056 million ...