Heating Oil Futures Price
The heating
oil futures price is different than the heating oil price in the cash (physical) market. Generally, the price of a commodity
for future delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees). This
is called contango. The opposite of contango is backwardation. Backwardation is when the price of a commodity for future delivery
is lower than the cash price Backwardation is normal in a “seller’s market.”
When you trade heating oil futures, your futures price depends on where you get
into the market. After you post your initial margin, your profit or loss depends on where you enter and exit the market (minus
transaction costs).
For example:
The contract size for heating oil is 1000 U.S.
barrels. So each $1 move equals $1000. As the market moves your account value adjusts. If your account value drops below the
maintenance margin, a margin call is due. A margin call can be met by offsetting positions or adding money to your account.
Trading
futures is like driving a car without insurance. You save the insurance premium, but if you crash you will wish that you were
insured. If you have very deep pockets or deal with the physical heating oil product then futures may be for you. If you are
a speculator with a limited amount of risk capital then heating oil options are a better way for you to invest in the heating
oil market.
