How to Trade Oil Futures

Like every other futures contract, oil futures contract or crude oil futures is a legal agreement that binds two parties to either buy or sell oil at a predetermined amount, at a stipulated time in the future.

Crude oil is one of the most crucial commodities in the world today. From making cars run and planes fly, so many other heavy machines depend on one form of oil or the other, to run. Crude oil is a major source of energy in the world, in spite of the growing interest in renewable energy. It is one of the most actively traded commodities in the world today. It is also able to affect the prices of other commodities including natural gas and gasoline. By extension, crude oil prices can also have an impact on the prices of stocks, stocks, and currencies.

Trading Oil Futures

Crude oil is not only one of the most actively traded commodity in the world, but it is also one of the better commodities to trade on a futures contract. The oil futures market is one of the most active markets in the world as many traders follow up closely. The price of crude oil is bound to fluctuate at the slightest news concerning pricing. It is a highly volatile market that holds some promising opportunities for both day traders and long-term traders willing to take the risks. However, traders stand a chance to suffer losses if they end up on the wrong side of the price movement.

Primarily, there are two ways to trade oil in the US;

1. You could raise a couple of millions of dollars, lease a world-class petroleum tanker, strike a deal with any of the top crude oil-producing countries, and deliver the oil to a buyer at an agreed date.

2. Trade papers that represent large quantities of physical oil.

In the first instance, by going the extra mile to lease a tanker and sign a deal with any world-class oil-producing country, you become a physical oil trader. As a physical oil trader, you’d be responsible for transporting oil from one point to another. You’d also be responsible for managing all the logistics involved in transporting the oil. Whereas, in the second instance, by trading paper worth large quantities of oil you become an oil futures trader.

Thanks to standardized commodity exchanges like the New York Merchantile Exchange (NYMEX) and the Chicago Merchantile Exchange (CME), oil futures traders can easily trade, rather than sticking with the old way of going out to find a buyer and negotiating how much they want and when they would want oil.

Crude Oil Contract Specifications

There’s always a formula that can be applied when trading any kind of asset or commodity, and crude oil is no different. Before trading crude oil futures, you must have good background knowledge of how it works. If you are a new trader, here are specifications to look out for:

• Ticker symbol: CL

• Exchange: NYMEX

• Trading hours: 6 pm to 5 pm ET

• Contract size: 1,000 U.S barrels (42,000 gallons)

• Contract months: All months

• Price quote: Price per barrel (example: $65.00 per barrel)

• Tick size: $0.01 per barrel ($10.00 per barrel)

• Last trading day: Third business day before 25th calendar day of the month preceding the delivery month

It is important to note that when trading a futures contract, you must keep to the expiration date and stated price. In other words, you must buy or sell a commodity before the delivery date, at the agreed price. Traders also have the leverage to offset a trade before the expiration date.

Factors that can influence the price of crude oil

There are certain factors that can influence the price of crude oil they include heating oil and unleaded gas. There’s also the issue of volatility which tends to rock the oil futures market from time to time. Oil prices are unpredictable and can easily be affected by political, geopolitical, or economic activities. Other factors that can influence crude oil futures include long-term trends in oil prices, weekly stock reports, and dollar strength. It is common to find oil prices changing overnight at the slightest news of a swing in price movement.

Usually, a futures contract a major determiner of price movement is demand and supply, however with oil futures trader’s emotions also drives price movements. Assuming, there’s tension in the Middle East, there’s no telling what the outcome may be. If traders panic based on the tension and uncertainty surrounding it, the effect is most likely going to fall on oil prices. An example is the recent fall in oil prices on Monday that was a result of panicking traders trying to meet up with the May contract deadline. Their activities pushed oil prices into the negative.

The sharp fall in oil prices was triggered by the activities of traders who sought to trade by all means as the last day to trade oil in the May contract drew near. This was followed by a fast market decline over the past weeks which reached a fever pitch on Monday. As a result of these activities, oil prices fell as desperate oil traders that had insufficient storage for crude were forced to take action.

The major reason why oil prices tend to move so swiftly is that traders with short positions in the market try to cover up their shorts as soon as possible when the prices go up.