From the June 2013 issue of Futures Magazine • Subscribe!

Energy leaders and followers

One barrier to trading heating oil vs. Brent crude oil futures as a pair is the large difference in price. Heating oil futures are priced by the gallon. On March 28, the June contract was $3.0330 per gal. The price of Brent crude oil covers a 42-gallon barrel. On March 28, Brent June futures were trading at $109.79. Although the futures prices are far apart, we know from the cumulative change chart that their price movements are related closely. 

“Close friends” (below) tracks the spread from Oct. 1, 2012, through March 28, 2013. The spread is computed by multiplying the heating oil futures price by 42 gallons per barrel and subtracting the price of a barrel of Brent crude oil.

To trade the heating oil-Brent crude oil spread in the form just described would involve multiple heating oil contracts to equalize gallons and barrels. Fortunately, this spread has been recognized by CME Group and the IntercontinentalExchange (ICE), although the exchanges specify the spread differently. The ICE heating oil-Brent spread permits trading the spread between the ICE heating oil futures and ICE Brent futures. The spread trade consists of a long position in ICE heating oil futures and a short one in ICE Brent futures, with all positions financially settled.

The CME Group’s heating oil-Brent spread futures primarily specifies a floating price for each contract month equal to the arithmetic average of the New York Harbor No. 2 heating oil futures first nearby contract month settlement price minus the arithmetic average of the ICE Brent crude oil futures first nearby month settlement price. 

An approximation of the spread futures offered by CME Group and ICE is the spread between two futures on a nearby contract month shown on “Close friends.” The computed spread is a closer fit with the CME Group futures because it consists of a single spread dollar price.

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