A:

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.)

RELATED FAQS
  1. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  2. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  3. Who sets the price of commodities?

    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Answer >>
  4. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ... Read Answer >>
  5. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  6. Do all oil companies received the quoted price of West Texas Intermediate for their ...

    Learn about the three benchmark oil prices, the primary factors that determine the quality of crude oil and the price it ... Read Answer >>
Related Articles
  1. Options & Futures

    Commodities: Heating Oil

    By Noble DrakolnHeating oil is a refined byproduct of crude oil. After crude oil is broken down during the refinement process, it is separated into heating oil. Similar to diesel oil, heating ...
  2. Term

    Determining Oil Prices With Benchmarks

    The many types of crude oil and the different sites from which it’s extracted means buyers need an easy way to value the commodity based on quality and location.
  3. Options & Futures

    How To Lock In Low Oil & Gas Prices

    We provide a quick overview of how companies can manage the risk of adverse moves in commodity prices by hedging in the futures market.
  4. Markets

    Crude Oil Prices: Comparing Future Price Vs. Current Market Price

    Discover the differences between oil futures market prices and oil spot market prices and what leads to the differences between the two.
  5. Economics

    Will Raising Fuel Efficiency Standards Kill the Oil Industry?

    Diminishing returns to fuel efficiency means the oil industry is safe in the medium and long term.
  6. Investing

    Will Clean Energy Fuels Create A Better Network?

    Ever since the most recent U.S. energy boom began, many people have looked for ways to take advantage of cheap natural gas from shale gas areas.
  7. Investing Basics

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  8. Options & Futures

    20 Investments: Futures Contract

    What Is It? As the name implies, futures are contracts on commodities, currencies, and stock market indexes that attempt to predict the value of these securities at some date in the future. ...
  9. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  10. Options & Futures

    Commodities: Crude Oil

    By Noble DrakolnCrude oil is a naturally-occurring substance found in certain rock formations in the earth. To extract the maximum value from crude, it needs to be refined into petroleum products. ...
RELATED TERMS
  1. Fuel Tax Credit

    A federal subsidy that allows businesses to reduce their taxable ...
  2. Sweet Crude

    A type of oil that meets certain content requirements, including ...
  3. Sour Crude

    The name given to barrels of crude oil that do not meet certain ...
  4. Biodiesel

    A fuel derived from organic oils, such as vegetable oil, rather ...
  5. Oil Refinery

    An industrial plant that refines crude oil into petroleum products ...
  6. Buying Hedge

    A transaction that commodities investors undertake to hedge against ...

You May Also Like

Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center