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Futures Measures

Heating Oil and RBOB (Gasoline)

Futures Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Pete’s diving deeper into yesterdays discussion of trading oil futures by looking at Heating Oil and RBOB (gasoline).

When trading crude oil, traders have to be right about both price direction and timing, by trading heating oil and gasoline traders have far more tools at their disposal as they can look at season strategies and intermarket spreads.

Pete explains the two types of cracks spreads being looked at in this segment:

  1. Crude Oil and Gasoline
  2. Crude Oil and Heating Oil

The seasonality of gasoline sees higher prices during the summer, when more Americans are driving, while heating oil typically sees higher prices in the winter, due to consumption to heat homes.

The refiners are cognizant of this seasonality and shift production throughout the year, which plays an important role in price discovery. Much of the production rate shifts are driven by input costs at the time.

Pete dissects how to calculate the crack spread. The spreads are typically shown as the refined product minus crude oil. However, crude is quoted as dollars per barrel, while gasoline and heating oil are dollars per gallon. To convert we multiply the price of gasoline or heating oil by 42, given that there are 42 gallons per barrel.

Typically by November the industry has sufficient supplies of heating oil but continue to produce more. When consumption peaks supply is usually plentiful, which leads to aggressive liquidation in the early part of the new calendar year.

On the other hand gasoline supplies that are being built will gain value as we move into spring and then summer.

Throughout winter, we may see heating oil start to drop while gasoline rises, but the relationship could easily invert. By trading the spread between the two, or as a crack spread with oil we can take a directional stance on either product, while reducing overall oil volatility risk.

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