If you missed part one of our discussion about heating oil and gasoline, then catch it here.
Many investors would assume that we would see a price lift in the heating oil market with winter approaching. However, by the time November rolls around, the market has already discounted the expected change in demand and priced it into the price of heating oil. This means that as we head into winter, you may see heating oil prices start to drop and gasoline prices start to rise (the relationship may even invert). This generally can take weeks to happen and the markets may bounce around between levels during this time.
To take advantage of the volatility during the time of year when demand starts to shift and when refiners start to build/liquidate inventories, we can trade a heating oil/gasoline spread.
To understand how the two products relate, it’s important to understand the crack spread which can determine the price of the cracked products (heating oil and gasoline). Something to be aware of is that gasoline has more crack spread volatility as winter approaches. The heating oil crack spread is not as volatile because heating oil is used as a proxy for diesel fuel (which has demand all year round).
If we assume that heating oil prices will go down and gas prices will go up heading into winter, we can place a spread trade that’s long gasoline and short heating oil.
Strategies: Futures Spread
Products Discussed In This Episode: /HO, /RB
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