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The heating oil futures contract has been traditionally used as a proxy for hedging diesel fuel. However, in recent years, environmental regulations have required a dramatic reduction in the sulfur content of diesel fuel, making the price spread between the two more volatile. To help refiners, wholesalers, and retailers hedge financial risk and aid in price transparency, NYMEX has listed two diesel futures contracts.
The Gulf Coast ULSD futures contract, coded LU, features physical delivery of fungible 61 Grade ULSD (15 PPM sulfur) into the Colonial Pipeline ratably in increments of 25 contracts during each cycle of the delivery month. Delivery takes place following termination of trading. The final settlement price is based on the average-weighted price of trades done in the closing range on termination day. Delivery shall be made F.O.B. the Colonial Pipeline at the injections station selected by the Seller at Pasadena, Texas; Houston, Texas; Hebert, Texas; Port Arthur, Texas; Lake Charles, Louisiana; Krotz Springs, Louisiana; Baton Rouge, Louisiana; Collins, Mississippi,; and Moundville, Alabama.
The contract is dually listed on the trading floor and CME Globex® electronic trading system. It trades in 42,000-gallon lots.
Government regulations currently require diesel fuel refiners to produce a minimum of 80% of diesel fuel as ULSD. In 2010, refiners will be required to produce the entire diesel pool as ultra low-sulfur grade. The Gulf Coast serves as one of two key trading centers in the cash market, the other being New York. |
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