On Friday the CME announced that it is no longer going to de-list heating oil futures and options, which was set to occur at the expiration of the April 2013 contract.  Rather than de-listing the existing contract and forcing the market to transition to the currently illiquid, NYH ULSD (ultra-low sulfur diesel) futures, CME is going to change the specifications of the existing heating oil contract, beginning with May 2013 futures.  The change will mean that, beginning with the May 2013 contract, the heating oil futures specs will reflect the specs of Colonial Pipeline Grade 61 ULSD.

CME said that it has no plans to de-list the existing New York Harbor ULSD futures contract, which implies that the exchange is going to let the market decide which contract to embrace, which will most likely continue to be "heating oil", as the specs for the NYH ULSD futures are also Colonial Pipeline Grade 61 ULSD.

This is good news and something we have been advocating for quite some time as the transition to a new contract can be quite difficult when one is looking to hedge long-dated fuel price exposure.   That being said, even with the continuance of the existing heating oil contract, the market will have to adapt to the new ultra low sulfur specs, which will, impact the basis relationships between the new contract and low sulfur (500 PPM) and high sulfur (2,000 PPM) distillates including diesel fuel, heating oil, jet fuel, kerosene, etc. 

Nevertheless, had CME stuck with their initial decision, the market would have embraced the change, as it did when the exchange de-listed the original gasoline futures and options contracts (HU) and transitioned to RBOB gasoline futures and options (RB).

It will be interesting to see how ICE responds to the CME's decision as ICE has listed low sulphur gasoil futures and options (10 PPM), along side it's existing gasoil contracts.  Like their siblings in New York, ICE's low sulphur contracts have yet to be embraced by the market, although ICE is pushing the contracts, as noted in their March "Monthly Oil Report" which stated the following:

Around thirty companies are active in the ICE LSG contract to date, which has a 2012 average daily volume (ADV) of 449 lots per day; approximately double the 2011 ADV. Counterparties who have been active in the contract include oil majors/refiners, banks, trading houses and proprietary traders.

It's also worth noting that CME's Gulf Coast ULSD Swap Futures are attracting a good amount of liquidity (current open interest of about 7,000 contracts) and are likely to continue to do so given the ever increasing activity in the Gulf Coast markets and the numerous, other markets which trade in relation to USGC benchmarks.

Heating oil futures are the oldest, successful energy futures contract in the world, having made their debut in 1978.  Interestingly, the listing of heating oil futures came to fruition as an act of desperation by the exchange.  In 1976, the CFTC banned the NYMEX's core product, Maine potatoes futures, following a large delivery default by Jack Simplot, the "Idaho potato king".

UPDATE: For more information on the transition from heating oil to ULSD futures and options see the following: NYMEX Heating Oil Completes Transition to Ultra Low Sulfur Diesel