Crude oil has been a major commodity in the world economy for more than a century and trading oil futures is one of the best ways to speculate on the price of crude oil if you can’t trade contracts for difference (CFDs).
If you want to speculate on the price of oil but prefer to hold stocks, you can either buy oil stocks or you can invest in oil ETFs, such as the U.S. Oil Fund (USO).
Buying oil stocks or shares of an energy or oil ETF will give you indirect exposure to the oil market, while trading oil futures more closely tracks the underlying crude oil market.
Trading oil futures also requires skill and an efficient and receptive broker. Remember, how you trade futures is just as important as where you trade, so make sure you pick the right broker.
Quick Look: How to Buy Oil Futures
- Step 1: Get Familiar with Oil Market Fundamentals
- Step 2: Develop a Plan of Action
- Step 3: Pick a Broker
- Step 4: Open an Account and Go Live
Overview: Buying Oil Futures
The often-volatile oil market is not for everyone, so be aware that many factors affect the price of oil and most successful oil traders have done exhaustive research on crude oil fundamentals to understand how they move the oil market.
The most important fundamental factors affecting the oil market involve production, reserves and world demand, although geopolitical concerns are also important since a large part of world oil production comes from the Middle East. Also, decisions made by the Organization for Petroleum Exporting Countries (OPEC) have a significant effect on production levels and, ultimately, on the price of oil.
The oil futures contract most commonly traded is the CME Group’s crude oil futures contract traded under the symbol CL. These contracts trade on the New York Mercantile Exchange and each contract represents 1,000 barrels of West Texas Intermediate (WTI) crude oil. Quotes for the contract are in U.S. dollars, with 0.01 per barrel the minimum price fluctuation, which is equal to $10 per contract.
CME Group futures contracts can be settled by physical delivery at the option of the seller of the futures contract.
Physical oil is delivered to a hub in Cushing, Oklahoma, although most oil contracts are settled through cash. Oil futures stop trading on the third day before the 25th calendar day of the month prior to the contract month.
In addition to the CME Group’s oil contract for WTI, you can also trade futures on Brent crude oil. The futures for Brent oil trade on the Intercontinental Exchange (ICE) under the symbol B and they are also for a contract amount of 1,000 barrels.
Both the NYMEX and ICE have electronic access, so anyone who has a brokerage account with a futures broker can trade in oil futures using an electronic trading platform. Keep in mind that brokers have the right to deny access to futures trading to anyone they deem too inexperienced or otherwise unsuited for the risks involved.
Once you’ve been approved to trade futures by your broker, you’ll need to post what is known as a performance bond. This is an amount of cash equivalent to 2% to 5% of the futures contract value. The additional deposit is needed to ensure that you have the financial means to hold the futures position.
In order to trade oil futures, you are required to provide the initial margin for the position, as well as the maintenance margin amount needed to keep the trade open. The amount of initial and maintenance margin varies depending on the amount of money in your account and the market price of the futures contract. Brent oil futures generally cost more to margin because of the higher price of the contract.
Step 1: Get Familiar with Oil Market Fundamentals
Knowledge is power, so the more you know about any market you plan on trading, the more prepared you’ll be and consequently, the more confidence you’ll have when you are actually trading. Oil is one of the world’s most important commodity, and its price has its own unique dynamic and valuation factors.
The commodity is also subject to numerous geopolitical triggers, such as unrest in oil-producing nations like Venezuela and tensions in the Middle East. Events that could cause the oil supply to decrease tend to push oil futures prices upward. Changes in global demand for fuel and competition among world producers can also affect the price of oil.
All of these known and expected fundamental factors are taken into account by the market to come to a consensus about the spot and futures oil prices you see quoted every business day on futures exchanges.
The difference between the main oil benchmarks is known as the Brent-WTI spread. Brent crude originates in the North Sea off the coast of the United Kingdom, and it contains less sulfur than WTI. In theory, WTI would seem to be the more expensive oil due to it being “sweeter,” or lower in sulfur content, although this is not the case in practice.
Brent crude is more widely used and can more easily be made into diesel fuel than WTI, which is better for gasoline production. Brent will therefore generally trade at a higher price per barrel than WTI. The Brent-WTI spread has favored Brent consistently, and a narrowing or inversion of the spread has only been seen on very few occasions.
Step 2: Develop a Plan of Action
After you’ve researched oil fundamentals and monitored the oil market for some time, you can start to develop a trading plan. Ideally, you would have money and risk management components in your trading plan to limit your risk and avoid losing your entire deposit.
Trading without a plan of action is a recipe for failure. Remember, you are dealing with a rather volatile commodity futures market so you need to have the correct position size in relation to the amount of money in your account. You should also enter stop-loss orders in the market if you cannot be watching it, just in case you took a position based on a view that turns out to be incorrect.
While technical analysis methods are often used to determine entry and exit levels for commodities, the crude oil market has considerable fundamental influences that could potentially move the price drastically when unanticipated changes occur. To develop a successful trading plan, all of these factors should be taken into account.
Step 3: Pick a Broker
After developing your strategy and incorporating it into a trading plan, you can then find a futures broker. When selecting a broker, you might want to try out their platform and test your trading plan in a demo account first without risking any money.
Not all online brokers offer trading in futures. The best futures brokers will generally require a substantial initial deposit and then require that you prove you have the knowledge and experience to trade in the futures market. We’ve listed 3 highly respected oil futures brokers below.
Interactive Brokers is one of the most versatile brokers you can find online. It offers a trading service in multiple markets from fixed income to commodity futures like crude oil. While the minimum deposit to open an account might exclude many smaller traders at $10,000, the broker offers one of the best trading platforms and some of the lowest margin rates in the business.
One extremely useful thing about trading futures with Interactive Brokers is its Continuous Futures feature. By choosing a Continuous Futures contract, you can configure Interactive Brokers’ platform to add the new lead futures month automatically and remove the expired contract, which lets you avoid rolling over your futures position. In addition, the feature lets you chart the futures contract across multiple expirations and apply technical indicators accordingly.
IBKR’s TWS trading platform is one of the highest rated among seasoned traders and is perfect for traders operating in multiple markets simultaneously. The platform includes IBKR’s most advanced trading algorithms and customizable trading tools and layouts.
You can also download a mobile app for iOS and Android, in addition to a more basic trading platform called Client Portal. The Client Portal lets you see quotes, check your account balance and place trades. Interactive Brokers also offers a demo account so you can test your trading plan and get more familiar with the oil market.
Commission for U.S. oil futures and options on futures contracts is $0.85 per contract plus exchange and clearing fees. Margin requirements for a NYMEX oil futures contract is an initial intraday amount of $2,598.75, with an intraday maintenance margin of $2,079. Overnight initial margin is $5,197.50, with an overnight maintenance margin of $4,158.
NinjaTrader offers a trading service in commodity futures, including oil futures, on its sophisticated trading platform which caters to both new and more advanced traders. The platform’s extensive technical analysis tools and charting capabilities will generally fit the needs of traders at all levels.
You can check out NinjaTrader’s platform through the broker’s demo account and get the NinjaTrader software for free when you fund an account. You can also lease the software if you choose to use another broker. The software gives you access to charts, market analysis and the opportunity to perform simulated trading.
You can open a futures account with as little as $400 with NinjaTrader, and you can get deeply discounted commissions by purchasing a platform lifetime license. Commissions on futures range from $0.53 to $0.95 per contract, which does not include exchange and clearing fees. Initial margin requirements for oil futures at NinjaTrader are $3,465, and the broker also charges $1,000 for intraday margin and $3,150 for maintenance margin.
Generic Trade specializes in providing a trading service in futures and futures options. The Generic Trader Online trading platform is web-based so you can trade from any computer with online access.
In addition to its basic platform, which is offered at no cost, you can also get the Generic Trader Professional for $59 a month, which is designed for more sophisticated traders. The monthly cost includes the mobile version of the software for iOS or Android.
Generic’s commissions are only $0.59 per side on all futures and futures options trades, in addition to exchange and clearing fees. The initial margin rate for an oil futures contract at Generic is $3,465, while maintenance margin for position traders is 10% of the initial margin.
Generic Trade does not require a minimum amount to open an account, but to trade oil futures with this broker, you must have at least the initial and maintenance minimum margin amounts to be able to trade.
Step 4: Open an Account and Go Live
You should then be ready to open up a funded account and take your strategy to the ultimate test of trading it live after you’ve developed your trading plan, tested it in a demo account and chosen a suitable broker.
Remember that oil futures trade with considerable volatility, so make sure you’re prepared when the market starts to move. Make sure to keep a keen eye on international news and geopolitical events that might affect the price of oil. Fundamental factors like a war, revolution or election in an oil-producing country could have a significant effect on the oil market.
Futures trading requires a larger minimum deposit than trading in many other types of tradable assets. In addition to the higher initial deposit and margin costs, trading futures requires that you become extremely familiar with the market you plan to trade.
The oil market has enough volatility to make short-term strategies worthwhile. Many online brokers like Interactive Brokers even offer a reduced margin requirement for day traders.
Furthermore, if you have a sufficient account balance to weather significant swings, then holding a long- or medium-term position in the oil market could be very lucrative if your call on the market aligns with the underlying trend.