Hedging Heating Oil Costs with a Single, Convenient ETF

by: Index Universe November 17, 2008 | about stocks: UHN    
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By Matthew Hougan

The weather turned cold in Maine today, and that has me thinking about two things: heating oil and ETFs.

Jason Zweig and I were chatting about this some time ago. Does it make sense for a New Englander to hedge the cost of home heating oil using the US Heating Oil ETF (NYSEArca: UHN)?

It's a major expense. It takes about 650 gallons to keep my house warm each winter. This summer, when prices were topping $4.25/gallon, that was a pretty daunting figure: $2,700 +/- spread over five or six months really makes a dent in a journalist's budget.

The best thing about the financial crisis (maybe the only good thing) is that it's driven down the price of oil and gas dramatically. We're now paying about $2.50/gallon locally for heating oil, which is a much easier price to swallow.

But will the price stay low? The volatility in the Energy patch right now is terrifying. Oil could just as easily go back to $3.50/gallon as it could drop down below $2/gallon.

Which is where the hedge comes in.

In the summer, my local heating oil services let me "lock in" the price of heating oil if I want. At $4.25/gallon, I passed. But with oil down at $2.50/gallon, locking in the price is more attractive. Trouble is, my oil supplier ends its "lock-in" window in August.

With UHN, however, I have a chance. I'm guessing I'll spend about $1,625 this year on heating oil. Right now, UHN (which tracks the price of near-month heating oil contracts on the NYMEX) is trading for $28.20/share. So all I have to do to lock in my fuel costs is buy 58 shares of UHN, stick them in my brokerage account, and sell out in May.

Of course, it's not a perfect hedge. Local oil costs don't match perfectly with national costs, and the timing when I get oil deliveries will influence my expenses. But if oil goes back to $3.50/gallon or more, I'll make a tidy profit on UHN to counteract the rising costs of my heating bill. Is that worth a $20 round-trip on commissions? Maybe.

I haven't pulled the trigger on this trade yet, but as the thermometer drops, it's looking more and more interesting.

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This article has 4 comments:

  •  
    Nov 17 07:48 PM
    This seems pretty cool. How did you arrive at 58 shares?
    Reply | Link to Comment
  •  
    Nov 17 08:32 PM
    Really? you cant figure out how he came up with 58 shares.. I understand this is a flame post but common...

    58*$28.20 (price of etf in article) = $1,636 which is close to the $1,625 he estimated he will spend on heating this season.

    I think it is an absolutely fantastic strategy. The author is a true american looking for how he as an individual can look out for his financial interests. No complaining, no whining, no asking for a government subsidized hedging program artificially raising/lowering spot prices so that he can continue in ignorant bliss.

    If only the rest of the country were more like this author. The tools to protect yourself financially are out there. With options and etf's tracking every imaginable sector/commodity/price one can truly hedge out any risk they deem as too great to accept for a nominal fee. If you were worried about your financial future the day after the presidential election you could have even bought or sold future contracts for a specific candidate. The tools are out there everyone just needs to put down the stick with a rock tied to it and pick up the laser scalpels laying on the floor.

    /end long winded tirade.


    On Nov 17 07:48 PM Jack K wrote:

    > This seems pretty cool. How did you arrive at 58 shares?
    Reply | Link to Comment
  •  
    Nov 18 01:24 AM
    what about short-term capital gains...

    isn't our government irritating? perfectly good idea, deflated by idiots who we pay to be powerful policy making idiots. Kind of like paying your torture-master more the more it hurts. or something like that.

    --ikk
    Reply | Link to Comment
  •  
    Nov 18 12:55 PM
    Good concept. Are we approaching a good time to buy a gasoline producer?
    Reply | Link to Comment
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