In early 2007, the New York Mercantile Exchange announced that traders would be able to buy or sell futures contracts on New York Harbor ultra low sulfur diesel and U.S Gulf Coast ultra low sulfur diesel. These contracts can be used by traders to hedge against rising or falling diesel prices. The contracts started trading on the New York Mercantile Exchange on May 13, 2007. (For background reading, see A Beginner's Guide To Hedging.)

Another interesting point about learning to hedge against rising diesel prices is to understand the process by which this product is made and how it is priced in the commercial market.

One common method used to answering this question lies in learning about a petroleum product known as heating oil. This product is also known as No.2 fuel and is used primarily to heat homes and buildings by fueling furnaces/boilers. When hedging diesel prices, heating oil is important because the two fuels are produced together and are chemically similar. Diesel fuel is often priced at a stable premium to the price of heating oil, which is an underlying commodity of futures contracts listed on the New York Mercantile Exchange.

If you plan to purchase a significant amount of diesel at a later date and you also believe that the price of diesel is going to increase, you may want to take a long position in heating oil futures. This long position will enable you to profit if the price of heating oil does continue to rise prior to the date you wish to purchase the diesel.

(To learn more about futures, see our Futures Fundamentals tutorial.)

  1. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  5. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  6. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
Related Articles
  1. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  4. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  5. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  6. Chart Advisor

    ChartAdvisor for November 20 2015

    Weekly technical summary of the major U.S. indexes.
  7. Chart Advisor

    Like Ranges? These Are Stocks to Consider

    Whether you want to trade the price fluctuations within a range, or await a breakout, here are four stocks for you.
  8. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  9. Chart Advisor

    Low P/E Stocks Ready for a Turnaround?

    These stocks appear to be of great value based on P/E and Forward P/E.
  10. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  2. Swap

    A derivative contract through which two parties exchange financial ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Convergence

    The movement of the price of a futures contract towards the spot ...
  5. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  6. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center