Spread Betting on Heating Oil
When looking at spread betting on heating oil futures, you have to understand the market that is behind the numbers. The future contracts are deliverable on every month of the year, and are used to hedge prices for people who need heating oil to run their businesses.
Heating oil is fairly low viscosity, not heavy like crude oil, and is used as the name suggests for fuelling furnaces or boilers in buildings. It is actually the second-largest product from refining crude oil, which yields about 25% heating oil, the largest product being petrol. Refining oil consists mainly of evaporating the crude oil so that the petroleum distillates are given off at different temperatures and can be separated.
Some people misunderstand how futures contracts in oil work to hedge prices, as there are many more different kinds of oil than there are types of contracts. The fact is that most types of oil go up and down in price in parallel, so the business that hedges with a futures contract will just pick a similar type of oil, without expecting to take delivery of it. If the contract rises in price, the oil the business wants to buy in the future will rise about the same amount, so it is covered against increases in price. Sometimes the contract will fall in price, as will the oil the business needs to run. In this case the business has finished up paying more than it needed to. In hindsight, it could have kept the money and spent less when it needed the oil. However, that is not the point of hedging the price, which just guarantees the financial outflows for the business, and protects against the consequences of an increase.
Apart from some competition from bio fuels, it seems that heating oil and other types of oil will continue to increase in cost for the foreseeable future. To some extent, the price of oil is seasonal, and goes through cycles. Heating oil in particular is obviously in great demand during the winter months, when you can expect the price to be firm or increase. However, if the winter is less severe than expected, or than previous winters, then the market can over anticipate and oil will not go up as foreseen.
In addition to keeping an eye on the cycles, the way to start to spread bet on heating oil is to examine the fundamentals of the charts, going back over several years looking at different time scales. This will give you an idea of how much supply and demand can vary the cost during the year.
When it comes to placing a spread bet, you need to consult technical analysis to determine a good entry point for your bet. It seldom works to spread bet or do short-term trading on the basis of fundamentals alone, because all these can indicate is the general trend to be expected, and do not anticipate fluctuations with volatility which can force you to exit the bet for a loss, if you placed the bet at the wrong time.
How to Spreadbet on Heating Oil
The current spread betting price for heating oil is 32,713 – 32,743 for a futures style bet with IG Index.
You can see from the recent chart above that it is a volatile price, so if you are inexperienced it would not be a good financial security to start spread betting on. In addition, it is one of the markets that is extensively traded by professionals, who would be quick to take advantage of beginners in the field.
Perhaps your analysis has suggested that the price is due for a downward retracement, and you decide to place short bet for £2.50 per point. The price might drop to 32,151 – 32,181, and you decide to close the bet and take your profit.
As you took out a short bet, it was placed at the lower price quoted, 32,713. When it closed, the buying price was 32,181. That means you have won 32,713-32,181 points. This works out to 532 points. Your bet was for £2.50 per point, so by multiplying out you found you have won £1330.
Possibly after you placed the bet the price decided to rise, and you were faced with the need to close the bet for a loss, to protect you from losing too much. Say it went up to 32,788 – 32,818, and you decided to cut your losses, and closed the trade. As before, your bet was placed at 32,713 but this time it closed at 32,818. The difference between these numbers is 105 points, so with your chosen stake of £2.50 a point you have lost £262.50.
For a second example of a spread bet on heating oil, consider that you may have decided in the first place to place a long or buy bet for £4 per point, thinking that the upward trend would continue. The long bet will go on at the higher price of 32,743. Assuming this works out, perhaps you would close this bet for a profit when the quote reaches 33,056 – 33,086. The bet closes at 33,056.
Working out how much you have won, the difference between 33,056 and 32,743 comes out to 313 points. Multiplying by your stake of £4 per point, you find you have won £1252 on your short bet.
Even the best of traders recognize that they must lose a percentage of their bets. No one can be correct all the time, and the market will sometimes surprise the best of analysts. It is important to realize that this does not mean you lose overall, as it depends how you deal with your losses. The best thing is to get rid of losing bets as quickly as possible, before the amount mounts up. If your losing bets lose you less than your winning bets gain, then even with the same number of each you will make a profit. Suppose the heating oil price goes to 32,659 – 32,689, and you close your bet.
You open the bet at 32,743, and closed it at 32,659. That means you lost 84 points. For your stake of £4 per point, you lost £336.
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