Market Overview: Heating Oil (HO)

Distillation is the primary method of refining Crude Oil into Heating Oil. The Crude Oil is heated at the bottom of a tall, metal tower. As the Crude gets hotter, it turns to a gaseous state, the vapors rise. As the vapors rise, they cool. Each Crude Oil by-product, in its gaseous state, has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions like fuel oils, and diesel fuel are taken from the bottom part of the heating tower. Lighter fractions like butane, gasoline and kerosene are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products.

The six basic types of refined petroleum products are jet fuel, kerosene, motor gasoline, diesel fuel, residual fuel and distillate fuels. Heating Oil is the primary product of the distillate fuels, accounting for roughly 45 percent of the total distillate fuels. As the name implies, the major use of distillate fuels is used for primarily heating homes.

Seasonal Overview:

Since the major demand for Heating Oil is, as the name implies, fuel for heating, one would assume that during the cold weather seasons the market would rally. As is often the case, market lore is a fallacy. The cold weather months of January, February, October, November, and December tend to be seasonally weak price periods. The primary use for Heating Oil is to heat residences and must be purchased in bulk (by the tankful). As such, an entire season’s Heating Oil needs is typically purchased before the cold season begins, or the demand runs ahead of the eventual need. March and April are typically strong months for Heating Oil as people run out of fuel. If winter extends itself into spring, then there is an immediate need for Heating Oil. May and June are marked by pockets of bullish and bearish price movements. July, August and September are typically strong months as consumers buy Heating Oil ahead of the impending winter. October through the end of the year is generally weak, as residences have already met their Heating Oil needs before the winter began.

Heating Oil: (High: Oct-Nov or Jan//Low: Feb-Mar or June-Jul) New demand at lowest ebb at end of winter, bottoming with March deliveries. Consumption remains low through summer. Inventory building peaks in Oct-Nov; heaviest consumption in Jan, coldest month of year.

Chart courtesy of Moore Research Center, Inc.