Buying (Going Long) Heating Oil Futures to Profit from a Rise in Heating Oil Prices

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Why Are Gas Prices So High?

When Else Have Prices Been as High

Image by Theresa Chiechi © The Balance 2020

For the week of April 29, 2020, the U.S. regular gas price was $2.76 a gallon according to the Energy Information Administration. That’s a 30% increase over the $2.12 a gallon listed for the week of January 7, 2020. That’s lower than the $2.85 a gallon for prices last year. Gas prices typically rise in anticipation of higher demand in the summer driving season.

High gas prices are created by high crude oil prices. Oil costs account for 54% of the price of regular gasoline. The remaining 46% comes from distribution and marketing, refining, and taxes, which are more stable. When oil prices rise, you can expect to see the price of gas to eventually rise at the pump.

Three Causes of High Gas Prices

The three major causes of high gas prices are supply and demand, commodities traders, and the value of the dollar. These are also the determinants of oil prices.

Supply and Demand. Like most of the things you buy, supply and demand affect both gas and oil prices. When demand is greater than supply, prices rise. For example, U.S. shale oil producers increased the oil supply in 2020. Gas prices fell to their lowest levels in five years. But that shale oil boom reversed when low prices put many producers out of business.

Seasonal demand also affects oil and gas prices. You can expect them to rise every spring. Oil futures traders know the demand for gas rises in the summer as families go on vacation and hit the road. Regulations also require a shift to summer-grade gasoline, which is more expensive to produce. They start buying oil futures contracts in the spring in anticipation of that price rise.

Commodities Traders. Traders of commodities like gasoline, wheat, and gold, also cause high gas prices. They buy oil and gasoline at the commodities futures markets. Those markets allow companies to buy contracts of gasoline for future delivery at an agreed-upon price. But most traders have no intention of taking ownership. Instead, they plan to sell the contract for a profit.

Since 2008, both gas and oil prices are affected more by the ups and downs in these futures contracts. The price depends on what buyers think the price of gas or oil will be in the future. When traders think gas or oil prices will be high, they bid them up even higher. In this way, commodities traders create a self-fulfilling prophecy. This leads to an asset bubble. Unfortunately, the one who pays for this bubble is you at the gas pump.

The Value of the Dollar Declines. Gas and oil prices also rise when the value of the dollar declines. Oil contracts are all denominated in dollars. Oil prices rose between 2002 and early 2020 because the dollar lost 40% of its value during that time. Oil prices fell between late 2020 and 2020 in part because a strong dollar allowed the members of the Organization of the Petroleum Exporting Countries to make more money while keeping supply constant.

When Else Prices Have Been High

Here’s how different situations, from conflict on the world stage to engineering mishaps, affected the price of gasoline.

April 2020: Fears about unrest in Libya and Egypt sent oil prices up to $113 a barrel. In May 2020, as oil prices dropped, the price at the pump stayed high. Why? Commodities traders were concerned about refinery closures due to the Mississippi River floods.

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February 2020: Concerns about a potential military action against Iran, by either Israel or even the United States, caused high oil prices. Second, some U.S. oil refineries were closing, according to an Environmental Impact Assessment report. Third, oil and gas prices tend to rise every spring, in anticipation of increased demand during the summer.

As a result, the prices for a gallon of gasoline hit the benchmark $3.50 by February 15, two weeks earlier than in 2020. By mid-March, the national average had jumped to $3.87 a gallon. That’s because, two weeks earlier as well, the price of oil reached its benchmark of $100 a barrel. Oil went on to hit $109.77 per barrel by the end of February, before dropping slightly to $107.40 per barrel in mid-March.

August 2020: Prices were high as a result of Hurricane Isaac, which hit the U.S. Gulf Coast region on August 28, 2020. In anticipation of the Category 1 hurricane, refineries in the area shut down production. As a result, crude oil production lost 1.3 million barrels per day. This caused the average national price of gas to jump in one day, from $3.05 per gallon to $3.80 per gallon. Prices in Ohio, Indiana, and Illinois rose even further, as the storm closed a pipeline that feeds the Midwest.

September 2020: Prices rose to an average high of $4.50 a gallon in California. That was because of a supply shortage from two causes. The first was a power outage at the ExxonMobil refinery in Torrance, California. A heat wave caused the power failure. The second was a shutdown of a major north-south oil pipeline. These came on top of East Coast refinery shutdowns due to regular seasonal maintenance.

March 2020: Iran started war games near the Strait of Hormuz early in 2020. Almost 20% of the world’s oil flows through this narrow checkpoint bordering Iran and Oman. If Iran threatened to close the Strait, it would have raised the fear of a dramatic decline in oil supply. In anticipation of such a crisis, oil traders bid up the price, which reached $118.90 a barrel on February 8. Gas prices soon followed, rising to $3.85 a gallon by February 25. These rose again in August 2020 because oil prices hit a 15-month high that summer. That spike was created by political unrest in Egypt.

April 2020: Prices rose in April 2020 because the price for domestic oil rose to $101 a barrel. The domestic oil price is benchmarked by the reference grade, West Texas Intermediate. Oil prices rose because new pipelines from the Cushing, Oklahoma storage hub lowered inventories to the lowest level since November 2009. In addition, the price of imported oil, a grade called the North Sea Brent, rose to $110 per barrel. This was caused by political unrest in Ukraine, Nigeria, and Iraq. The EIA expected average national prices of gasoline to remain at $3.60 a gallon until May.

July 2020: In California, the price at the pump increased to almost $4 a gallon in July 2020. Midwest refinery problems sent California’s oil elsewhere. Since it doesn’t have major pipelines from other regions, California had to wait for tankers with imported oil to arrive. A similar issue happened in 2020. It was just a temporary regional problem.

August 2020: Gas prices rose from an average of $2.58 a gallon to $2.62 a gallon. This spike was due to an outage at BP’s Whiting refinery in Indiana, making prices in the Midwest higher than average.

November 2020: Gas prices rose when OPEC cut production. Members agreed to reduce supply by 1.2 million barrels per day in January 2020. In response, traders bid oil prices to $51 a barrel in December 2020. That was double the 13-year low of $26.55 a barrel in January 2020. Gas prices rose for 14 consecutive days after the meeting. The national average of $2.21 per gallon was up 20 cents compared to the same time period the previous year.

August 2020: Average gas prices rose from $2.35 a gallon to $2.49 a gallon. Hurricane Harvey wiped out 5% of the nation’s oil and gas production. The Department of Energy released 500,000 barrels of oil from the Strategic Petroleum Reserve. By September 5, gas prices had returned to normal.

November 2020: OPEC agreed to keep production cuts through 2020. At a meeting of OPEC and non-OPEC oil-producing nations in December of 2020, they again cut production. On January 15, 2020, the EIA released its forecast for two major crude oil benchmarks, Brent and WTI. The agency predicts that Brent will average $60.52 per barrel in 2020 and $64.76 in 2020, while the WTI will average $54.19 and $60.76.

May 2020: Global oil prices reached $80 per barrel following the U.S. decision to pull out of the Iran nuclear agreement and reinstate sanctions. Production in Iran dropped through the end of 2020. In addition, Libya and Venezuela faced limited production. Gas prices rose to $2.85 a gallon.

Factors That Force High Gas Prices to Drop

The April to September vacation-driving season often causes an increase in gas prices. But prices fall in the winter since transportation needs and production costs are lower. This price decrease even offsets an increase in home heating oil usage for winter in northern areas of the United States.

Gas prices will drop when supply increases. There are a lot of ways that could happen. OPEC could decide to release more oil. The United States could lift sanctions against Iran. Shale oil producers could find another large deposit or create new technology.

Prices will also fall as the dollar’s value rises. OPEC can allow supply to expand since they’ll remain profitable with a rising dollar.

Most important is the impact all these factors have on commodities traders. If they believe oil and gas prices will fall, they won’t bid up futures contracts. They may even find another investment, allowing prices to decline further.

What We Can Do to Reduce Prices

The most immediate thing we can do is reduce our usage of gas by driving less or increasing fuel efficiency. The best way to increase fuel efficiency is to keep tires inflated. Urban dwellers can use public transit. Others can move closer to work to reduce commuting time.

For the long term, we can change our need for oil and gas by switching to alternative fuel vehicles.

Could these actions reduce the high price of gas? They might if they were on a sustained basis over a long period of time.

The only real way for consumers to lower gas prices is to reduce demand for gas and oil for a sustained period. But the demand for gasoline and fuel isn’t declining, and it’s unclear whether the development of alternative fuels will help. The United States consumes 20% of the world’s oil. This has increased over the last 20 years, from 15 million barrels per day to 19.69 million barrels per day. It’s expected to keep rising, at least over the short term.

5 Steps to Making a Profit in Crude Oil Trading

Crude oil trading offers excellent opportunities to profit in nearly all market conditions due to its unique standing within the world’s economic and political systems. Also, energy sector volatility has risen sharply in recent years, ensuring strong trends that can produce consistent returns for short-term swing trades and long-term timing strategies.

Market participants often fail to take full advantage of crude oil fluctuations, either because they haven’t learned the unique characteristics of these markets or because they’re unaware of the hidden pitfalls that can eat into earnings. In addition, not all energy-focused financial instruments are created equally, with a subset of these securities more likely to produce positive results.

Key Takeaways

  • If you want to play the oil markets, this important commodity can provide a highly liquid asset class with which to trade several strategies.
  • First, decide if spot oil (and if so what grade), a derivative product like futures or options, or an exchange-trade product like an ETN or ETF are most appropriate for you.
  • Then, focus on the oil market fundamentals and what drives supply, demand, and price action, as well as technical indicators gleaned from charts.

How Can I Buy Oil As An Investment?

Here are five steps needed to make a consistent profit in the markets.

1. Learn What Moves Crude Oil

Crude oil moves through perceptions of supply and demand, affected by worldwide output, as well as global economic prosperity. Oversupply and shrinking demand encourage traders to sell crude oil markets to lower ground while rising demand and declining or flat production encourages traders to bid crude oil to higher ground.

Tight convergence between positive elements can produce powerful uptrends, like the surge of crude oil to $145.81 per barrel in July 2008, while tight convergence between negative elements can create equally powerful downtrends, like the August 2020 collapse to $37.75 per barrel  . Price action tends to build narrow trading ranges when crude oil reacts to mixed conditions, with sideways action often persisting for years at a time.

2. Understand the Crowd

Professional traders and hedgers dominate the energy futures markets, with industry players taking positions to offset physical exposure while hedge funds speculate on long- and short-term direction. Retail traders and investors exert less influence here than in more emotional markets, like precious metals or high beta growth stocks.

Retail’s influence rises when crude oil trends sharply, attracting capital from small players who are drawn into these markets by front-page headlines and table-pounding talking heads. The subsequent waves of greed and fear can intensify underlying trend momentum, contributing to historic climaxes and collapses that print exceptionally high volume. (For related reading, see: Financial Markets: When Fear and Greed Take Over.)

3. Choose Between Brent and WTI Crude Oil

Crude oil trades through two primary markets, West Texas Intermediate Crude and Brent Crude. WTI originates in the U.S. Permian Basin and other local sources while Brent comes from more than a dozen fields in the North Atlantic. These varieties contain different sulfur content and API gravity, with lower levels commonly called light sweet crude oil. Brent has become a better indicator of worldwide pricing in recent years, although WTI in 2020 was more heavily traded in the world futures markets (after two years of Brent volume leadership).

Pricing between these grades stayed within a narrow band for years, but that came to an end in 2020 when the two markets diverged sharply due to a rapidly changing supply versus demand environment. The rise of U.S. oil production, driven by shale and fracking technology, increased WTI output at the same time Brent drilling underwent a rapid decrease.

U.S. law dating back to the Arab oil embargo in the 1970s aggravated this division, prohibiting local oil companies from selling their inventory in overseas markets. This ban was removed in 2020. 

Many of CME Group’s New York Mercantile Exchange (NYMEX) futures contracts track the WTI benchmark, with the “CL” ticker attracting significant daily volume. The majority of futures traders can focus exclusively on this contract and its many derivatives. Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) offer equity access to crude oil, but their mathematical construction generates significant limitations due to contango and backwardation.

4. Read the Long-Term Chart

WTI crude oil rose after World War II, peaking in the upper $20s and entering a narrow band until the embargo in the 1970s triggered a parabolic rally to $120. It peaked late in the decade and began a torturous decline, dropping into the teens ahead of the new millennium. Crude oil entered a new and powerful uptrend in 1999, rising to an all-time high at $157.73 in June 2008. It then dropped into a massive trading range between that level and the upper $20s, settling around $55 at the end of 2020. As of Feb. 13, 2020, it closed at $51.52. 

5. Pick Your Venue

The NYMEX WTI Light Sweet Crude Oil futures contract (CL) trades in excess of 10 million contracts per month, offering superb liquidity. However, it has a relatively high risk due to the 1,000 barrel contract unit and .01 per barrel minimum price fluctuation.   There are dozens of other energy-based products offered through NYMEX, with the vast majority attracting professional speculators but few private traders or investors.

The U.S. Oil Fund offers the most popular way to play crude oil through equities, posting average daily volume in excess of 20-million shares. This security tracks WTI futures but is vulnerable to contango, due to discrepancies between front month and longer-dated contracts that reduce the size of price extensions.

Oil companies and sector funds offer diverse industry exposure, with production, exploration, and oil service operations presenting different trends and opportunities. While the majority of companies track general crude oil trends, they can diverge sharply for long periods. These counter-swings often occur when equity markets are trending sharply, with rallies or selloffs triggering cross-market correlation that promotes lockstep behavior between diverse sectors.

Some of the largest U.S. oil company funds and their average daily volume as of Feb. 14, 2020, are:

  • SPDR Energy Select Sector Fund: 14,959,493 
  • SPDR S&P Oil and Gas Exploration and Production ETF: 29,009,145 
  • VanEck Vectors Oil Services ETF: 9,882,904 
  • iShares U.S. Energy ETF: 552,719 
  • Vanguard Energy Index Fund ETF: 543,733 

Reserve currencies offer an excellent way to take long-term crude oil exposure, with the economies of many nations leveraged closely to their energy resources. U.S. dollar crosses with Columbian and Mexican pesos, under tickers USD/COP and USD/MXN, have been tracking crude oil for years, offering speculators highly liquid and easily scaled access to uptrends and downtrends. Bearish crude oil positions require buying these crosses while bullish positions require selling them short.

The Bottom Line

Trading in crude oil and energy markets requires exceptional skill sets to build consistent profits. Market players looking to trade crude oil futures and its numerous derivatives need to learn what moves the commodity, the nature of the prevailing crowd, the long-term price history, and physical variations between different grades. (For related reading, see: Introduction to Trading in Oil Futures.)

Buying (Going Long) Heating Oil Futures to Profit from a Rise in Heating Oil Prices

Follow CL1! Following CL1! Unfollow CL1!

CL1! Futures Chart

Ideas

LIGHT CRUDE OIL FUTURES

Salve ragazzi, dopo il crollo nelle settimane scorse, finalmente il petrolio reagisce su una struttura di acquisto, formando 2 setup di price action long, si tratta di un FTW REVERSAL e di un INSIDE FAKAUT, tutti e 2 sono potenti segnali di rimbalzo, il petrolio potrebbe anche andare ha chiudere il gap segnato in rosso, ma come operazione di breve, qualche.

There is a lot of extremely interesting action in crude oil right now. Here on the weekly futures chart, you can see that CL printed a huge bullish engulfing candle last week, as it reacted to major support at the bottom of the falling wedge pattern (in blue.) As I mentioned in last week’s crude oil analysis, crude was deep in oversold territory on the weekly RSI.

any trade below 33$ will consider that the confirmation reversal pattern still not confirmed

I had an amazing trade that i did not post about from 20.23 to 26.5. I will look for a lower low at 29.75 and then short it to 27.15 This trades are the money makers and all the money is what i am investing in to education from Jsun and dopetrades Please commnet bellow if u think im making anything wrong here.

ppl blame putin,trump and saudis

Hello everyone we are reached 20$ per barel Now I expected some correction up We are forming reversal pattern falling wedge Swing trade Best regards EXCAVO

Crude oil is starting to look attractive to me. You can see here on the monthly crude oil futures chart that the biggest drawdowns of the past four decades have all been in the 70% range. There was a 70% drawdown in the 80’s, one in the 90’s, one in 2008, on in 2020/2020, and we are currently having one now. Since the beginning of the year, curde has fallen 69%.

Crude oil has printed a massive gap on the weekly chart. We can see that price has fallen to the bottom of a triangle formation, which it is currently testing. We can also see that the light crude market is severely oversold on the weekly RSI (blue graph at the bottom.) So, since crude is so deeply oversold, and price is testing known support, I think a bounce.

US Light Crude Oil Futures (CL1!) looks bearish by any measure, as you can for example see using our Fractal Trend indicator. Given this, we are looking for potential support levels. The first noticeable support is right around here. Price may try to consolidate and find support on the bullish order blocks at S1 formed in 2002. Looking at the green arrows on.

Not financial advice. I’m not a financial advisor. I’m learning to trade. Learn to trade. CL1 Daily. Maybe dealing with a false breakout at the moment here but this is what it looks like to me. Target @47 area which matches up with the target of weekly bear flag/correction. These two targets also align with the dec 18 lows. If we do breakdown, and reach that.

Oil is close to its top. There can be one more push up but if the lines break then a B correction will have been underway. I am looking for a top. I have closed my long position already.

Headlines • Crude Consolidates in Asia as It Retraces to $24 Handle • Natural Gas Continues its Monthly Run of Inventory Cuts Showing -19bcf for the Week • US Futures Down Whilst Asian Stocks Finish Lower

Important S/R zones

Significant levels are updated Partially accumulate as it falls in order to trade the pullback.

All arguments are my subjective opinion 1. In such a large amount of oil is necessary to nobody. Supply exceeds demand 2.Transition to electricity 3. Shale oil – another attempt at manipulation 4.Saudi Aramco – largest capitalization company in the world (another bad call for me) Many fundamental arguments can be made, but this is a virtual trading chart and it.

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