Heating Oil Futures: A Key Cog in Energy Markets Turns 40

At a Glance

  • Suppliers and consumers in the heating oil market saw the need for a contract that allowed for physical delivery as well as the ability to manage risk.

CME Group’s New York Harbor Ultra-Low Sulfur Diesel (ULSD) contract hit the big 4-0 on November 14, 2018.  As it hits middle age, ULSD shows no sign of slowing down.  So far this year, the contract has set open interest and volume records while international participation is booming.

The original launch was greeted with some skepticism.  NYMEX had already seen its first energy contract – Rotterdam fuel oil – fail in 1974 and there was concern that the new contract would go the same way.

But the product, originally named No. 2 Heating Oil, quickly proved its value.  Volumes grew sharply within a few months of launch and have never looked back.  Suppliers and consumers in the heating oil market saw the need for a contract that allowed for physical delivery as well as the ability to manage risk.

The greater market efficiency provided by the futures contract ultimately led to more transparent pricing for consumers across the U.S. Northeast who relied on No. 2 Heating Oil to warm their homes.

Movin’ On Up

ULSD soon moved well beyond its original role to become a useful proxy for the global middle distillates markets – the section of the oil barrel that includes gasoil, diesel and jet fuel.  Airlines and trucking companies as well as the original heating oil market all look to USLD for their price signals and hedging needs.

The success of ULSD also helped to pave the way for the successful launch in 1983 of WTI crude oil, the deepest and most liquid crude oil benchmark globally. WTI trading originally began in the same pit as ULSD.

The existing liquidity on ULSD helped to ensure a strong start for WTI.  Traders quickly began to trade the price differential between WTI and ULSD, known as the ‘crack spread’, in order to lock in the value of refining crude oil into middle distillates.

Life Begins at 40

A 40th birthday is often an opportunity for some self-evaluation: how did we get to this point and where are we going next?  Certainly, much has changed since USLD was launched at the height of disco fever and the Cold War.

One major development has been the greater focus in recent years on how energy markets impact the environment.  ULSD has moved with the times.  The contract went through a specification change in 2013 that reduced sulfur content in line with new tighter environmental standards.

The past 40 years have also seen ULSD move beyond its traditional home in the U.S. Northeast.  ULSD is now traded around the world – some 10 percent of ULSD volume currently trades outside U.S. hours.  This share of international participation is only likely to grow as the U.S. energy markets become ever more connected to the international markets following the shale revolution.

Recent records for traded volume and open interest confirm that the USLD contract continues to be an important market.  Diesel and jet fuel demand continues to grow globally as countries industrialize, ensuring the need for a reliable price benchmark and for risk management has never been greater.


is Global Head of Research at CME Group. He is based in London.

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