How to Invest in Heating Oil
Heating oil is a low-viscosity petroleum product that is derived from crude oil. As a result, heating oil prices are often tied to WTI crude. Generally, 25% of the yield of a barrel of crude is devoted to heating oil, the second most after gasoline.
Heating oil is generally used as a fuel for furnaces or boilers to heat homes and businesses. The fuel is especially popular in parts in of Northeastern U.S. where natural gas and propane are either inaccessible or too expensive for these often cold markets. The product is also popular in the British Isles and especially Northern Ireland. Furthermore, contracts of the fuel are a popular choice for those seeking to hedge prices of diesel and jet fuel which do not trade as liquidly as heating oil does but are often a stable premium above NYMEX heating oil futures contracts.
For those looking to invest directly in heating oil, a limited number of options are available. While there are heavily traded futures contracts for the product, there are currently no pure play stocks or equity ETFs that invest in companies that exclusively produce heating oil and do not also refine it themselves from crude oil. With that being said, some smaller firms or even some utilities may be a way to gain some level of exposure to the sector. There are, however, a number of ETPs that offer exposure to the commodity\’s futures contracts either in a basket or pure-play form.
Ways to Invest in Heating Oil
There are 3 ways to invest in Heating Oil: ETFs, Futures, and Stocks. Click on the tabs below to learn more about each alternative.
What are Heating Oil ETFs?
Though heating oil is not nearly as popular with investors as are other types of oil commodities, there is an ETF focusing exclusively on this resource. The United States Heating Oil Fund (UHN) invests in near month heating oil futures, rolling exposure as expiration approaches. As such, this ETF will deliver returns that may not correlate exactly with spot prices; UHN is designed to deliver returns available through a futures-based strategy.
Several broad energy ETFs also include exposure to heating oil, including the PowerShares DB Energy (DBE) and iPath Dow Jones-UBS Energy ETN (JJE).
What are Heating Oil Futures?
Heating oil futures are traded on the New York Mercantile Exchange under the symbol HO. Each contract represents 42,000 gallons of heating oil, and contracts are priced in dollars and cents per gallon. Currently, contracts are listed through January 2013.
How to Buy Heating Oil Stocks
Investors have the option of achieving exposure to prices of energy commodities by buying stocks of companies engaged in the extraction, refining, and sale of oil. While many of these companies focus their operations around gasoline and crude oil, heating oil can be expected to exhibit a strong correlation to these energy commodities. As such, stocks of companies such as BP, ExxonMobil, Total, Royal Dutch Shell, and ConocoPhillips can offer indirect exposure to heating oil prices.