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You may have often heard that crude is the new gold, but unlike gold, it has much more impact on the other commodities; no doubt, it is one of the most traded commodities globally. The price of crude oil affects the prices of different commodity products such as natural gas and gasoline, but that’s not because oil prices also significantly affect bonds, stocks, and forex traded worldwide.
What are oil futures?
Oil futures represents contracts in which you agree to buy or sell oil at a predetermined price, on a predetermined date. Usually, a futures contract specifying the earliest delivery date. For gasoline, heating oil, and propane each contract expires on the last business day of the month.
By trading oil futures, you can trade rising prices and falling prices.
How to buy oil futures?
To buy oil futures or oil options you need to trade on a commodities exchange using your broker. You can invest in oil in 3 ways:
- Buy oil futures on commodity exchange using a broker
- Invest in oil using CFD broker
- Buy oil ETF shares
- Buy shares of oil companies that are in oil business
How many barrels of oil in a futures contract?
There are 1,000 barrels or 42,000 gallons in one futures contract. However, the trader does not need to pay the full amount of the contract because of high leverage in oil futures trading.
Who buys oil futures?
Oil futures buy people who like active and volatile markets, usually trend traders. Oil futures, as derivative securities, give the holder the right to purchase oil at a specified price.
With changing times, nations are thinking of developing and using renewable energy sources, but crude remains the popular energy source. Though that’s about its general usage, the best way to take advantage of this commodity is by trading crude oil through oil futures, a derivative instrument. The question may arise in your mind that who buys oil futures, what are oil futures, and how to trade oil futures, right? Well, this article would answer all your doubts.
As you might know, crude is a raw form used to make heating oil, gasoline, diesel, petrol, fuels, and other petrochemical products. Even in these different types, there are various fundamental grades and popularity levels for trading purposes. The most famous crude oil futures is “light sweet crude oil” as it is easy to transform it into other products; it gets traded on NYMEX (New York Mercantile Exchange.) In the second place comes Brent Blend Crude oil, which is mostly traded on the London market.
The futures market for crude oil is highly active and attractive to traders. These futures contracts’ rates get affected even by the smallest of news, making it a heaven for day traders and swing traders. Oil futures markets are volatile and suitable for short-term trading, but you can get burnt if you lack skills and knowledge.
Types of Oil Futures
Three major countries across the globe are pioneers in producing oil. The United States is in the first place, and recently Russia has taken second place of Saudi Arabia, putting it in third place.
There are many types of oil futures, like there are many markets to trade them. One such is WTI (West Texas Intermediate), which is crude from the US wells; this product is sweet and light and suitable for gasoline. It is traded on the Chicago Mercantile Exchange (CME) under the ticker name CL.
Another one is NYMEX Middle Eastern crude, also known as the Dubai and Oman oil; its high sulfur content is heavy and sour. It is traded on the Dubai Mercantile Exchange.
If you want to learn more about the crude market and keep yourself updated with the ups and downs, you should follow the Weekly Energy Stocks report released by the U.S. Energy Information Administration (EIA) every Wednesday around 1 o’clock noon (Eastern Time.)
What are Oil Futures?
If you are new in this commodity field, you may wonder what oil futures are; well, here is your detailed answer. Learn and remember these specs before you start trading.
Particular |
Details |
| Ticker Symbol |
CL |
| Trading Exchange |
NYMEX |
| Hours of Trading |
6 to 5 pm (Eastern time) |
| Contract Size |
42,000 Gallons or 1000 US Barrels |
| Contract Months |
All Months |
| Price / Quote |
Per Barrel Price |
| Tick Size |
$10 per Contract per $0.01 per Barrel |
| The Last Day of Trading | The third business day before the 25th calendar day of the month preceding the delivery month. |
How to day trade oil futures?
Oil futures can be traded daily, using a nimble strategy (every few hours change stop loss and target) on lower time frames such as M30, M15, tick chart. See strategies below:
As a crude oil trader, you have to understand the basics of oil futures. By taking an oil futures contract, you agree to buy or sell the commodity at the stated date of expiration at a pre-decided price. By holding the contract, you have to take the oil barrels’ physical delivery, and the only method of avoiding it is to execute the contract before expiry. You should not trade in oil futures if you are starting off trading in the commodity market.
When to Trade Oil Futures?
Other commodity products such as heating oil and unleaded gas prices can impact crude oil futures rates. It witnesses higher demands at the time of summer and winter as in summer; people take vacations. It boosts crude oil usage, while in winter, people use heating oil (especially in the Northeast) to keep the surroundings warm. This led to higher demand and higher price fluctuations.
It would help if you also kept yourself updated with the OPEC price slump or increase in supply (Organization of Petroleum Exporting Countries). It impacts oil prices around the globe very actively.
How much money do you need to trade oil futures?
Minimum futures trading amounts:
The amount of capital that traders need to have in their accounts to day trade an oil futures contract depends on the futures broker. The lowest amount of money for trading futures is $100 for traders who use the MT5 platform (MT5 brokers). In practice, the minimum amount of money for trading futures needs to be more than $500. Some brokers require at least $1000 as a minimum amount for trading futures. Traders need to have enough money in the account to accommodate for potential losses.
Hotforex broker offers futures trading in MT4 and MT5. Hotforex offers leading spot and futures contracts on Indices such as FTSE (UK100), the NASDAQ (USA100), DAX (GER30), etc., as well as oil futures.
What Affects Crude Futures?
The following events impact the prices of crude futures.
- News Events worldwide (it can be during the day or night time, as futures are traded 24 hours a day.)
- Middle East nation’s economic condition they are a significant producer of oil.
- Price cut and supply acceleration of crude oil.
- Day trading investors’ emotions.
- Demand and Supply of oil.
- Geopolitical tensions in the middle east nations can create supply disruptions.
Another thing impacting crude prices is the value of the American dollar. If the dollar’s price is high, it will hike the crude prices, whereas a lower dollar rate would support the oil rates. Crude futures go parallel with the stock market, but they go in the opposite direction like gold.
A stable and growing economy, along with a soaring market, can indeed prove a boon for higher crude oil rates. When oil prices hike dramatically and reach levels like $100 per barrel, it would only harm the economy. A trader has to keep him/herself on track with all these news and changes and work on the trading strategy accordingly to avoid losses and make profitable trades.
Price Fluctuations in Trading Crude Futures
In crude futures, the price fluctuates very rapidly, and the reason behind it is the traders. Day traders often wind up their positions when the price moves up or in the opposite direction. They even cover the trade with the buy order; for example, when they see that their short selling is not working out, they immediately sell their trade and place a buy order to go along with the long positions taken by other speculators.
In many cases, they may even get a margin call if their trading accounts go beyond the minimum margin requirements regarding a sudden event causing loss.
Crude futures are often driven by psychological trades (trader biases of whether the price would shoot up or fall.) Following the trend in this market can prove helpful, but it can change at any time. Though the changes are not that random as the market does give some technical signs to traders, it requires experience and skills to identify such indicators and place the trade at the exact time. One such indicator is trading in ranges; traders trade within a certain price range until the price bracket finally breaks out and has no room for the same price movements.
How to Trade Oil Futures?
No doubt, crude oil futures are very popular among day traders, but they are still of high risk given the global events’ sensitivity.
As a day trader of oil futures, you should keep an eagle eye on the pivot points to get the support and resistance levels. It would help if you also had a stop loss to save your trades from downside risk. Keeping yourself updated with global events is something that you have to learn daily. Trading crude futures is very similar to trading stock index futures like E-mini S&P.
Trading crude futures is not rocket science but definitely involves meticulousness in trading and thinking capabilities. So, keep yourself focused, gain exposure, make mistakes (not too much that you can’t afford to trade again) and learn from your experience. And with time, you would get ease in trading this commodity for sure.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
