History of Heating Oil Futures
A futures contract is a derivative financial product that allows the holder to purchase or sell a set amount of the underlying commodity or security. The price to be paid or received is fixed in the futures contract and must be exercised by a certain date. Most futures contracts are closed out prior to expiration. Heating oil futures are one of the most heavily traded of these derivative products, and are used by producers or buyers of heating oil to hedge risk, or by speculators to profit.
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Origins
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Heating oil futures first started trading in 1978 on the New York Mercantile Exchange (NYMEX). This was the first of the energy-related commodities or by-products to have futures trading. It was quickly followed by crude oil in 1983, then unleaded gasoline in 1984.
Early History
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The NYMEX heating oil futures contract was the first successful attempt to trade futures in the energy market. The NYMEX succeeded because of its physical location in New York City, which was at the time the financial center of the U.S., and the unprecedented volatility in oil prices that occurred just after the introduction of trading in 1978.
This price volatility was caused by several geopolitical events and forced producers and buyers of energy products to see the futures contract as an efficient method of hedging risk.
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Late History and Growth
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Daily average volume in heating oil futures on the NYMEX has increased over the last 25 years. Average daily volume was 6,927 contracts in 1982, and reached 77,403 in 2008.
Open interest is a term that refers to the number of futures contracts that have been entered into, but not yet closed out by market participants. The open interest for heating oil futures on the NYMEX has increased steadily since trading started. In January 1986, open interest was only 29,066 contracts, increasing to 125,082 by January 1996. In August 2009, open interest stood at 313,857 contracts.
Heating oil futures also trade on the ICE Futures exchange with contract terms similar to those of the NYMEX heating oil futures contract. There is very little volume on this exchange, and the NYMEX is the clear market leader.
Underlying Physical Product
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The underlying physical product for heating oil futures is No. 2 fuel oil, which is created during the crude oil refining process. About 25 percent of each barrel of crude oil becomes heating oil during the refining process. The primary use of this product is for residential heating.
Contract Terms
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Each contract on the NYMEX represents 1,000 barrels, or 42,000 gallons, of heating oil. The contract is priced in dollars and quoted in cents per gallon. The minimum price increment for the heating oil futures contract is $0.0001 per gallon
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