The Fundamentals of Crude Oil Futures Trading

The Fundamentals of Crude Oil Futures Trading

The prices of many other commodities, like gasoline and natural gas, are influenced by the price of crude oil, one of the most actively traded commodities in the world. However, the price of crude oil has a knock-on effect that affects the value of currencies, equities, and bonds globally. Despite growing interest in the renewable energy industry, it continues to be a significant source of energy for the entire world.

Due to its high level of activity and popularity among traders worldwide, crude oil is one of the better commodities to trade on a futures contract. Oil prices are a favorite of swing and day traders who are searching for an edge because they change on the slightest whisper of news affecting pricing. Whether you are primarily interested in futures trading for the short term or the long term, this unpredictable market can offer some good trading possibilities. If you are on the wrong side of a price change, it can potentially result in significant losses.

Main points

  • Despite growing interest in renewable energy sources, crude oil remains one of the most widely traded commodities in the world and a key source of energy.
  • It is advisable for traders to comprehend the futures market. Crude oil futures are governed by many of the same rules as stock index futures.
  • Oil prices can fluctuate wildly and unpredictably in response to major news events.
  • After a significant move, crude oil frequently remains locked in extended ranges. Anyone who is able to recognize these ranges will have many chances to buy at the low end and sell at the high end.

Fundamentals of Crude Oil

Crude oil is the starting material that is refined to make petrochemicals like jet fuel, diesel, heating oil, gasoline, and many more products. Because it is a raw commodity, it comes in many different grades, and the fundamentals vary accordingly. Due to its ease of distillation into different products, light, sweet crude oil is the most traded grade of crude oil and is traded on the New York Mercantile Exchange (NYMEX). Another oil grade that is becoming increasingly popular is Brent Blend Crude, which is mainly traded in London.

The three countries that generate the most oil on the planet are Russia, Saudi Arabia, and the United States. The most commonly used benchmark for setting gasoline prices is Brent.

From American wells, West Texas Intermediate (WTI) is crude. The product, which trades on the Chicago Mercantile Exchange under the ticker CL, is excellent for gasoline (CME). Known as Dubai and Oman oil, Middle Eastern crude is traded on the NYMEX. It fits the description of a heavy, sour oil and has a greater sulfur concentration. Futures for this crude are available on the Dubai Mercantile Exchange. About three barrels of crude oil must be refined or processed in order to make two barrels of unleaded gas and one barrel of heating oil. These numbers aid in putting the need for crude into perspective and explain why production and supply levels are regularly monitored. 

The U.S. Energy Information Administration’s (EIA) Weekly Energy Stocks report contains the key reports for crude oil. Every Wednesday at roughly 1 p.m. Eastern time, this report is made public. 

Specs for Crude Oil Contracts

When you first start out, trading crude can be confusing. Try to commit to memory these requirements before you start: 

  • Stock ticker: CL
  • Trading: NYMEX
  • Trading hours are from 6 p.m. to 5 p.m.ET
  • Size of the contract: 1,000 US barrels (42,000 gallons)
  • All months of the contract
  • Price citation cost per barrel (for instance, $65.50 per barrel).
  • The tick size is $0.01 per barrel ($10.00 per contract).

The last business day prior to the 25th day of the month prior to the delivery month is the last trading day.

Traders ought to be familiar with the futures market. When you trade a futures contract, you are required to either acquire the commodity by the expiration date at the given price, or sell it—to “call” or “put” it. The only way to avoid having to physically receive 1,000 barrels of crude oil if you hold a call is to offset the trade before it expires. Futures trading is not advised for inexperienced investors. 

hints for trading crude oil futures

Keep in mind that the cost of heating oil and unleaded gas might affect the price of crude oil when monitoring price changes and placing trades. The summer and winter months typically see the biggest demand, although for different reasons. The demand for crude oil increases and prices rise throughout the summer due to more people driving. In the winter, there is a greater demand for heating oil, which drives up prices. Since the Northeast is the region of the country that consumes heating oil the most, keep an eye on the weather there as well as any changes in OPEC’s (the Organization of Petroleum Exporting Countries), which controls the supply and demand of crude around the world.

The crude oil futures market is highly volatile.

Overnight, significant news events can occur, leading oil prices to fluctuate substantially and with unpredictable results. Since oil futures trade continuously throughout the day, the same thing might occur at any time. A limited supply condition might aggravate price volatility regardless of Middle Eastern tensions or economic reports. Prices are determined by supply and demand, but the market also responds to sentiment, particularly when it comes to day traders who are retail investors. There is no way to predict how severe supply interruptions may be if tensions in the Middle East rise, and traders frequently respond quickly to breaking news by changing their strategy in response to price changes. 

The recent Russian invasion of Ukraine was one recent incident that drove up the price of crude oil. Crude oil reached its highest price since 2014 when it started trading above $100 per barrel in February 2022. 

Changes in the price of crude oil

Prices change so quickly because traders who have short positions in the market often cover such positions as soon as the price begins to rise, either erasing their gains or resulting in losses. They must place purchase orders to cover that in order to do that. Speculators are joining in on this wave of buying at the same time to start or increase long holdings. The risk is simply too large, and the shorts will swiftly cover it. Shorts could conceivably lose more money than they invested if a significant event occurs that disrupts supply, leading to a margin call from their brokerage—one of the most dreaded calls in the world of investors.

Crude oil is typically a moving market with a strong tilt to the upside or downside that is mostly driven by psychological movement. However, trading on the trending side will increase your chances of success. After a significant move, crude oil also frequently settles into extended ranges, providing plenty of chances for those who can spot these ranges to purchase at the low end and sell at the high end.

Until there is a definite breakout in either direction, some investors trade the ranges.

 The price of oil mostly depends on the strength of the US dollar. Oil prices are under pressure from rising dollar values while being supported by falling dollar values. Along with the stock market, crude oil frequently moves in the other direction. Higher oil prices are often supported by an expanding economy and stock market, but too-high prices might hinder growth. When oil prices go close to the psychological price threshold of $100 per barrel, this trend becomes a cause for concern. 

Day Trading Futures for Crude Oil

One of the markets that futures day traders prefer to trade is crude oil. Support and resistance levels, as well as pivot points, usually cause the market to respond positively. Stop orders are activated automatically, which can assist in lowering the high risk associated with a market that is capable of making extremely quick runs—up or down—at any time. In this market, you must make sure to use stop orders. Crude oil futures are governed by many of the same rules as stock index futures. You’ll likely enjoy trading crude oil if you enjoy the E-mini S&P. 

In June 2014, when the price of crude oil on the active month NYMEX crude oil futures contract reached slightly under $108 per barrel, a bear market in the commodity began. The price of WTI crude was fluctuating around $53.84 per barrel in January 2019 after falling to less than $30 per barrel by February 2016. As of March 2022, the price was largely influenced by the crisis between Russia and Ukraine and was circling at $110 per barrel.

Questions and Answers (FAQs)

How can I buy futures on oil?

Futures trading is not the same as stock trading. To trade futures, you’ll need a specific account with a brokerage. The amount of initial capital required varies depending on the broker, but you may anticipate needing a few thousand dollars. You can place trade orders once you have access to the futures trading market, just like you would with stocks or ETFs.

What qualifications do oil futures traders need to have to be successful?

Successful active traders in all markets have characteristics similar to those of successful oil traders. To design, test, and adhere to a successful strategy, they require discipline. In order to wait for trades to come to them, they must have patience. To be able to modify strategy as markets change, they must be flexible and forward-thinking. They require independence to avoid depending on a particular provider or tutor, mental toughness to handle losing streaks, and both.

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