If you want to start trading futures or switch brokers, visit NinjaTrader.
Electric vehicles (EV) may be the wave of the future, but fossil fuels feature higher energy density than many other energy sources. This density imposes a major challenge on the EV sector, limiting range and increasing costs.
In the meantime, oil keeps the world running, and you can profit from it. Learn how to trade oil now.
What Moves Oil Prices?
Historically, global rising demand for energy products drove oil prices. It was initially used by developed nations eager to feed the post-World War II economic machinery. Later, growing nations like China began purchasing oil at an exponential rate.
Prior to the pandemic, the U.S. consumed the most oil in the world at 19.7 million barrels per day. However, China isn’t too far behind, consuming 12.8 million barrels daily.
Although the rise of EVs present a fundamental threat to upward mobility of oil prices, this headwind is likely well into the future. According to the International Energy Agency, sales of electric cars topped 2.1 million globally in 2019. But this tally only represented 2.6% of global car sales, indicating that this market has a long way to go.
Another factor slowing wide scale EV adoption is price. Even with government subsidies, EVs are pricey. Some companies like Electrameccanica Vehicles (NASDAQ: SOLO) offer reasonably priced EVs but they compromise in areas such as capacity and functionality. Pound-for-pound, most consumers find it easier to purchase combustion-based cars.
While the demand outlook for crude oil is surprisingly positive, the Federal Reserve Bank of St. Louis notes that in the last several years, the “financialization of commodities” has helped drive oil prices. Essentially, traders have aggressively moved into this realm, creating boom-bust cycles that allow speculators to profit from the volatility.
If you’re looking to enhance your own profitability potential and can handle the extreme risks associated with trading oil, below are the steps to get you started in this exciting market.
How Oil Trading Works
As you know, oil is a commodity. It also happens to be the most desired thanks to its market value and incredible utility. Because of this enormous demand, participants trade oil in the form of futures contracts. A futures contract is an agreement to purchase a commodity at a predetermined date and at a specified price.
Futures contracts are critical not only for oil but for many other commodities, whether that be coffee beans, gold or pork bellies. That’s because the entities that take delivery of these goods or assets desire predictability.
Futures contracts provide a business function for affected industries. However, you can also trade contracts as a form of financial speculation. The emphasis is not on taking delivery of the underlying commodities, but profiting from the ebb and flow of the contracts’ pricing dynamics.
Logically, oil trading (or any other futures trading) is risky because you’re actively dealing with both sides of the table. Bulls and bears have contrasting incentives as to where the contract price heads, so you must be prepared for wild gyrations in the market.
Oil Contract Specs
Before you step foot into the crazy world of oil futures trading, you should understand the following key contract specs. Review the basics, but remember, this is not an all-inclusive list.
- Contract unit: 1,000 barrels
- Price Quote: Price (in U.S. dollars) per barrel
- Tick size: 1 cent per barrel ($10 per contract)
- Trading hours: Oil futures trade 6 p.m. to 5 p.m. ET, Sunday through Friday fSettlement Method: Deliverable
- Termination of Trading: Futures trading will terminate 3 business days prior to the 25th calendar day of the month prior to the contract month. If the 25th day is not a business day, then trading will terminate 4 business days prior.
Though it sounds like an obvious warning, futures trading is not a joke. Perhaps the biggest point to consider is your brokerage. If it allows you to actualize the contract (i.e. take delivery of the target commodity or provide it), you must be prepared to follow through with the terms unless you offset the contract prior to its expiration.
Best Way to Trade Oil Safely
If you’re looking to trade oil safely, then one thing is for certain: engaging the futures market is not for you. Those who lack the acumen to trade futures contracts competently can not only destroy their portfolio, they can permanently damage their finances.
With futures, if you’re unsure, don’t. Fortunately, you can still accrue profits relatively safely through other channels.
First, risk-averse investors should consider oil-based exchange-traded funds. These passively managed funds give you exposure to a basket of oil investments. Therefore, if one investment suffers, the others can help pick up the slack.
Second, you may opt for betting on individual big oil names like Exxon Mobil (NYSE: XOM) or Chevron (NYSE: CVX). Due to their massive footprint, these companies can give you relative stability.
Finally, if you’re truly gung-ho on trading futures, you can mitigate some of your risks with products like the E-mini crude oil WTI. The benefit is that you can trade the oil market with a lower margin requirement than a full-size contract.
Best Futures Brokers
With garden variety stock trading, your choice of brokerage isn’t truly that consequential. The same can’t be said about futures brokers. You want to pick a platform which you are comfortable with and that provides you the access and tools you need to be successful.
NinjaTrader is a powerful derivatives trading platform specializing in futures, forex and options. The platform has a number of unique trading tools. A free version does exist without the extra goodies provided by Trader + and OrderFlow + but users can still break down charts, backtest strategies and trade without upfront payment. NinjaTrader hosts its own brokerage services but users have their choice of several different brokerage options. Accounts have minimums depending on the securities traded and commissions vary depending on the version of the platform. Advanced derivatives traders will have endless fun with the platform’s mighty array of tools and analyzers.
The free version, which is included with all brokerage accounts is a great starting platform for new traders without the financial commitment. As you grow in your trading and are ready for more tools and functionality, you can add more complexity.
- Futures Traders
- Traders looking for 24/7 action
- Advanced Traders
- Powerful analysis tools
- Free download and simulated trading
- Open source trading apps to enhance experience
- Can only trade derivatives like futures and options
Tradovate is an innovative futures broker offering a tiered pricing structure and a comprehensive proprietary trading platform you can access with additional fees. Tradovate offers a community tab that allows you to connect with other traders and exchange trading ideas. New users can test out Tradovate’s platform with a demo account and free trial, which allows new investors to master the learning curve before opening an account. Though the platform might be too complicated for traders who prefer a simplified experience, it can be a strong choice for more experienced users.
- Experienced and intermediate futures investors
- High-volume traders
- Mobile traders
- Free trading platform packed with unique features
- Community tab allows users to connect with other traders
- Tiered pricing structure
- Easy to use out of the box for experienced futures traders
- Currently only supports futures trading
- Platform can be overwhelming for new traders
Discount trading is a no thrills futures trading broker that offers a multitude of options available to start trading. Low commissions, no inactivity fees, and powerful platforms to start trading.
- High volume / High frequency futures day traders
- Futures investors looking for the lowest futures margins
- Traders needing ultra-low commission rates
- Traders looking for great customer service and fast account opening
- Ultra-low commission rates ($0.49 or less)
- $500 (or less) Day Trading Margin on most markets
- No monthly inactivity fee
- Five different trade routing solutions
- Over 20 of the most popular platforms in the industry
- A completely free trading platform that includes free Level 1 Streaming Futures Quotes ● Support team that answers phone calls quickly
- Tough to find the best platform for your needs, due to the sheer number of options available
- Geared for traders with at least some experience trading the futures markets
Optimus Futures is a leading discount futures broker offering highly customized trading solutions geared towards cost-conscious retail traders with an eye for technology and personal service. Customers gain access to premium tools at no additional cost such as depth-of-market surface, footprint charting, and real-time news alerts along with a fully integrated trading journal.
Users can register a trial version of their software to take a test-drive of the platform, unlocking many of the analysis and charting features including unlimited simulated trades. Traders can also leverage Optimus Futures 3rd party app integration, allowing you to choose the futures trading platform best suited for you.
- Low account minimums, commissions, and margins
- Futures & micro futures traders
- Beginner futures traders
- Unlimited simulated trading
- Low day trading margins
- Highly experienced and competent technical support
- Customizable data fees and order clearing
- Limited to derivatives trading like futures
- The selection of data feeds and clearing firms can be overwhelming for newer traders
Is Oil a Good Investment?
While you should always consider contrasting views to better understand the risks and opportunities of any investment class, oil is a surprisingly viable market. This is due to the analyst community overwhelmingly pushing the EV and environmentalism narrative. While EVs are the future and though we are increasingly becoming an environmentally responsible society, a truly green global economy is still many years, perhaps even decades away.
Crude oil levers incredible energy density, an attribute that current EV battery technology can’t touch. True, research and development in commercially viable solid-state batteries present hope. But hope doesn’t pay the bills. Oil does.
Huge Profits May Await the Speculator
From an economy of scale perspective, the impressive EV machinery remains at a disadvantage to combustion cars. Until we start developing clean alternatives holistically, black gold will be around for a while.
Speculators can go against the grain of conventional wisdom and profit from the futures market. But be aware this is not a place for the faint of heart.