04-29-2018: July Heating Oil: Pricing Tracks Crude Oil

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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7     6


Heating oil prices generally track crude oil prices. A number of analysts believe increasing stocks of crude oil in the U.S. will not stop the rise in crude prices. A number of factors affecting crude go beyond supply and demand and relate to geopolitical economices and politics. There's quite a lot of which to be concerned about these days.

Refinery problems are also significantly affecting the output of distillates from crude oil as well.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

July Heating Oil:

Parabolic Chart

Nirvana Chart

July Heating Oil:

Initial Chart

News Analysis

Heating oil futures have moved into overbought territory according to analysts and will tend to reinforce a downside break if it occurs. There has been a series of refinery problems ranging from planned maintenance to unplanned maintenance, an actual explosion, resulting in a threat against U.S. product supply. A signficant downtick in U.S. refinery operations provides bullish support for the heating oil market. China may shut 10% of their refining capacity this year or six refineries increasing the need for Chinese imports into the region.

The explosion occurred at the Husky Oil Refinery near Duluth, Minnesota, but actually located in Wisconsin. This refinery dates back to the 1050's with a processing capacity of 50,000 barrels per day and a storage capacity of 3.6 million barrels of crude and products. It processes heavy crude from the Canadian tar sands in Alberta and lighter North Dakota Bakken crude.

Exxon reported that weakness in its chemical and refining operations offset a boost in oil prices. Exxon shares fell 2%.

Concern about U.S. imposing sanctions on Iran helped boost oil prices. Sanctions were previously lifted as part of an agreement with six other world powers over Tehran's nuclear program. Brent crude strengthened while West Texas Intermediate weakened on a stronger U.S. Dollar making exports less competitive. Surging U.S. exports rose to 10.59 million barrels per day in the most recent week encouraged by surging U.S. production. Shale drillers have been ramping up activity underpinning a widening discount between Brent and WTI, the largest since December 28th.

Deteriorating conditions in Venezuela led to a 40% decline in crude production there.

Some senators in Congress are calling for stronger renewable fuel standards after the EPA waived restrictions to major refiners. The lousy corrupt Scott Pruit EPA head has undermined thirteen years of work to establlish the Renewable Fuel Standard and threatens to undermine the renewable fuels industry. The EPA warped provisions to help small refineries to cover tens of millions of dollars in regulatory handouts to large refiners at the expense of farmers, biofuel workers, and American consumers.

Last January, a deep freeze in the U.S. created a heating squeeze for homeowners and utilities. There was a prompt to switch from natural gas to coal in electric stream generating plants. But this was followed by a warm spell in areas like New York in February. New York has been pushing programs to require cleaner heating oil with fewer pollutants.

There was a surprise crude oil inventory buildup in the U.S. in April. Inventories rose by 2.170 million barrels for the week ended April 20th versus exectations for a draw of 1.6 million barrels. Gasoline inventories also rose. The U.S. is the world's second-largest crude oil producer after Russia.

New Englanders are bracing for home heating oil costs to hit record highs this coming winter. One retail heating oil dealer said she expects a typical household delivery that cost $500 last winter will jump to at least $850 this winter. "It's going to be staggering," said Northboro OIl Co. owner Sandar Farrell in a telephone interview with the Associated Press. Some dealers are talking about retail prices of $4.89/gallon or $2 more than last year. This is ascribed this to recently soaring crude oil prices. Small dealers are being squeezed by customers who can't pay.

Typically, 25% of the yield of a barrel of crude oil is devoted to heating oil. Heating oil is generally used as a fuel for furnaces or boilers to heat homes and businesses. In certain parts of the U.S. Northeast, natural gas and propane are either inaccessible or too expensive.

A non-futures way to invest in heating oil is through the U.S.' only ETF fund targeted to heating oil, the U.S. Heating Oil Fund (UHB). It has futures exposure with lower risk and has been around since 2008.

There is generally tracking between heating oil futures prices and crude oil prices. Four lesser-known factors driving the cost of crude oil include the global economy, political tensions, emerging market demand, and substitutes (green energy).

Point & Figure Chart

250.0I                                                                  T  4/26
     I NYM - Jul-18 Heating Oil #2, 42000 gal, c/g Cm.=0.01  Lim.= 0.4
     IXO  XO
     IXO  XO
     I OX XO
     I OXOXO
     I OXOXO                X X
     I OXOXO                XOX
     I OXOXO                XOX
     I OXOXO                XOX
     I OX  OX               XOX
     I OX  OXO        X     XO
     I OX  OXO        XO    X
     I OX  OXO  X   X XO    X
     I     OXO  XOX XOXOXO  X
     I       O  XOXO OX  OXOX
     I       O  XOX      O OX
     I       OX XO         OX
     I       OXOX          OX
     I       OXOX          O
     I       OXO
     I       OX
     I       OX
     I       OX
     I       OX
     I       OX
     I       OX
     I       O
      11            111
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Pattern". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Heating Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $420. Initial margin on a single contract is $3,630. Use of options is advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are starting to get short in latest blip.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Heating Oil September 2.11 Put and Sell (1) Heating Oil September 2.13 Put @ .0011 to the sell side or greater.

o 1 o 2o 5

Calendar Spread

What the Jul. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. This disagrees with our ulitmate conclusion. The best time to enter or leave the above spread is when it is at +0.60 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -1.40 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is up.
223.0|                                                                  T  4/26
 NYM - Jul-18 Heating Oil #2, 42000 gal, c/g Cm.=0.01  Lim.= 0.4
     |TZZ[   <<<
123.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.129
                             1 1 1 1 1 1 1                            
       4 5 5 6 6 7 7 8 8 9 9 0 0 0 1 1 2 2 1 1 2 2 3 3 4 4           4
       2 1 2 0 2 1 2 0 2 0 1 0 1 3 1 2 1 2 1 2 1 2 1 2 1 2           2
       8 1 5 9 3 0 4 7 1 5 9 3 7 1 4 9 3 8 2 9 2 7 3 7 1 5           6

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 4/26 ).

Intraday Chart

                 Risk Versus Opportunity Report

                     HON8    July Heating Oil

                      High Price:  2.288
                   Current Price:  2.127
                       Low Price:  2.047

                            Risk:  0.074
                     Opportunity:  0.149

                    (O/R) Ratio =  2.012

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart - 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range 0
Commitment of Traders - 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 7
Place 4 July Heating Oil on a Buy Watch with stoploss @ 7.36 below the get-in point when recent price is represented as "213.30".