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
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.
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
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.
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.
Buy Oil Futures
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.
Frequently Asked Questions
Q: What is the best way to learn how to trade oil futures?
Q: Are oil futures a good investment?
Oil futures are one of the most frequently traded derivatives on the market — in short, it’s a great investment. You can thrive on oil futures’ high volume trades, leverage options and the fact that it’s relatively easy to get started.
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