Heating Oil Prices Explode
Tuesday, April 8th, 2008
Heating Oil prices advanced dramatically beginning on March 26, 2008 – from $2.7980 to $3.3028 per gallon wholesale in the New York market. Of course, delivery costs add to the total cost of the product when delivered into the customer’s fuel tank. Springtime weather is almost here now; but if prices remain at current levels when next winter arrives, will homeowners be able both to feed their families and to keep them warm? With the price of food increasing so rapidly at the same time as the price of heating oil for his furnace and gasoline for his car or truck, will the head of the family be so strapped that one or the other will have to give way? These are worrisome questions.
Was there any inkling of the recent rise in fuel oil prices; might the homeowner have done anything at all to offset it; and can he do anything to blunt the effect of price fluctuations in the future? The short answer is Yes, on all counts. The key lies in an examination of the charts of heating oil prices using Japanese Candlesticks analysis. Specifically, on March 25 the Daily price bar of heating oil was a “Hammer” pattern which arose after a six-day decline in prices. The “Hammer” is a classic bullish signal which warns of a possible reversal of trend to the upside, subject to confirmation by a higher closing price the next day. That is exactly what happened: On the following trading day, prices advanced smartly and closed substantially higher, concluding a three-day pattern which was a variation of a “Morning Star” pattern, which is also bullish. After a brief hiccup a few days later, prices resumed their strong uptrend through most of April, and closed at $3.3028 on April 25.
Had the homeowner (or any investor, for that matter) recognized the “Hammer” and the “Morning Star variation” patterns, he could have acted upon that information, or he could have elected to wait a few more days for further confirmation. Either way, he would have been in a position to profit from the rise in prices which followed.
Here’s the best case: Had he bought a May contract of heating oil at the low on March 25 ($2.7980) and sold it on April 25 at the closing price that day ($3.3028), he would have realized a profit of $21,201.60! That number is derived this way: On the heating oil futures market, each contract controls 42,000 gallons, and each movement (whether up or down) of one cent per gallon in the price of heating oil is worth $420. The difference between his theoretical entry price of $2.7980 per gallon and his theoretical selling price of $3.3028 per gallon was $.5048, or 50.48 cents. 50.48 multiplied by $420 equals $21,201.60.
Would the investor have been able to “catch” the price and enter at the low? Almost certainly not. He might well have waited until trading on the day following the “Hammer” was partially or nearly complete, in order to see whether there had been confirmation of the “Hammer’s” bullish signal.
By way of rounding out the story, it must be pointed out that in order to play at this table, the investor must either deposit funds by way of “margin” or pay up front for the cost of an option. While this example would have required an investment which was probably beyond the capability or risk-tolerance level of most homeowners, an investment club consisting of several individuals could have shared the opportunity and the risk, and could have benefited proportionately.
The point which is intended to be made is that - funds permitting - one does not have to sit idly by in supine passivity while prices of heating oil, gasoline, and other commodities are administered to us. Rather, devices do exist whereby profit can be made from both the advances and declines in market prices if the investor is knowledgeable enough, alert enough, and sufficiently funded to recognize and to act upon key change-of-trend Japanese Candlestick signals when they appear.
