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By the start of the winter season, oil and natural gas prices had reached levels unimaginable even just a few years ago. Many hedge funds who had done quite well investing in these commodities, realized that gas and oil had little room left to run and began to ponder the next great energy play. With the start of cold weather around the United States, the idea of investing in heating oil became a trend over the past several months, pushing prices to some of their highest levels ever, despite heating oil stocks being at five year highs. Heating oil is a highly seasonal investment. Used primarily in the northeast for heating older homes, the price of the commodity has two major variables: the weather and the price of crude oil. While well over 50% of the cost of production comes from crude oil prices, the demand is highly dependant on how cold the weather gets in places like Maine and New Hampshire. Given this winter's relatively mild temperatures, demand has not been nearly as great as feared, and stocks of heating oil are now some of the highest we've seen in recent years. The approaching end of the winter season is in sight and this is generally the time when speculators unwind their positions. At around $1.80 per gallon, The Commodity Investor believes heating oil is at historic highs, and won't see these levels again for several years. A drop below the $1.00/gal mark in the next 6-8 weeks would not surprise us. The Commodity Investor is the first publication on record to predict a large drop in the price of heating oil. We were also the first to predict such a movement in Natural Gas, and that prediction has played out just as we suspected (see A Crash in Natural Gas). |
