UPDATE: CME Sets Timetable For Diesel Futures To Replace Heating Oil

The world's inaugural energy futures contract, for heating oil delivered to New York Harbor, will be discontinued after April 2013, replaced on the New York Mercantile Exchange by a contract for ultra-low sulfur diesel fuel in response to changing environmental laws, CME Group (CME) said Wednesday.

The demise of the heating oil contract, which began trading in 1978, had long been heralded, but CME set the precise timing with the announcement.

Heating oil futures currently are listed for trading through January 2013. CME said that effective Aug. 22 three additional months will be listed, allowing the contract to trade through the end of winter before going off the board for good with the April 2013 contract settlement at the end of March.

Also on Aug. 22, the New York Harbor ultra-low sulfur diesel futures contract, currently listed through January 2013, will be listed for trade more than five years forward. That contract was first listed in 2007, but hasn't seen any trading activity recently. Nymex officials said they expect volume to pick up as the day draws near for the discontinuation of the heating oil contract.

CME said the move is related to regulatory changes to lower sulfur heating oil in New York state, basically making the product identical to ultra-low sulfur diesel fuel, used in trucks.

In July 2010, New York approved a switch to a sulfur content of no more than 15 parts per million in 2012, which is four years earlier than New Jersey's planned move to that level in July 2016.

The federal Environmental Protection Agency sets sulfur levels for diesel fuel, but states regulate heating oil, which is largely consumed in the Northeast U.S. In New Jersey, for example, home-heating oil currently can contain 2,000 ppm or more of sulfur.

Daniel Brusstar, CME group director for energy research and product development, said the timing set by New York state, which is the biggest consumer of heating oil in the nation, pushed the exchange to make the move in early 2013. The heating oil market, largely limited to the Northeast, is shrinking, while demand for ultra-low sulfur diesel fuel is growing, he said.

"The ULSD standard will be much more useable on a nationwide basis" and will be in line with global benchmarks, he said.

Ultra-low sulfur diesel stocks' share of distillate fuel inventories are growing nationwide. The fuel made up 69% of nationwide distillate stocks and 44% of East Coast distillate inventories on July 22, data from the Energy Information Administration show.

-By David Bird, Dow Jones Newswires, 1-212-416-2141

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