Warming up to Heating Oil
Today's Idea
The daily chart for February Heating Oil shows strong support near the 2.4500 area. With the market’s bias favoring the bulls, some traders may wish to explore selling Heating Oil put options with a strike price below the chart support area. For example, with February Heating Oil futures trading at 2.5515 as of this writing, the February Heating Oil 2.35 puts could be sold for about 0.125, or $525 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if February Heating Oil futures are trading above 2.3500 at option expiration in late January. Given the potential risk involved in selling naked options, some traders may wish to buy back the option before expiration should the February futures close below chart support at the 12/15 low of 2.4471.
Fundamentals
Like its Crude Oil cousin, Heating Oil futures have also staged a nice rally to end the year, with prices now trading at highs not seen since the fall of 2008. The market has found some support from the extreme winter weather seen in parts of Europe which has caused fuel demand for heating surge in December. Also supportive was the continued increased demand for all commodities in Asia, especially in China, where the country’s Central Bank has once again raised interest rates for the second time in the last 10 weeks to attempt to control rising inflation in the country. Although there are signs that China’s refineries have begun to significantly increase diesel production lately (Heating Oil futures are commonly used as a proxy for hedging diesel fuel), it will take a significant reduction in demand to prevent possible shortages in the world’s most populous nation. Here in the U.S., the most recent EIA energy stocks report showed that U.S. distillate inventories fell by a smaller than expected 589,000 barrels last week, and that Heating Oil stocks remain ample at nearly 1.6 million barrels above the 5-year average. With Oil prices hovering above $90 per barrel and the entire winter season still ahead, Heating Oil prices look to remain elevated going into the 1st quarter of 2011, unless we start to see a significant decrease in global energy demand or winter weather conditions begin to moderate significantly in Europe or the northeastern sections in the U.S.
Technical Notes
Looking at the daily chart for February Heating Oil futures, we notice that prices have been in a nice, steady up-trend since the August 2010 lows. Prices have started to pull away from the 20-day moving average, adding additional upside momentum. The 14-day RSI is strong, but still remains just below overbought levels, with a current reading of 69.28. The next near-term resistance is seen at the 2.6000 area, with near-term support found at the 12/15 low of 2.4471.
Mike Zarembski, Senior Commodity Analyst
