Among all physical commodities, crude oil is arguably the most liquidly-traded of them all. It’s liquidity is greater than its other energy counterparts, greater than the metals, and certainly greater than grains and livestock.
Of all physical commodities, crude oil has historically generated the most striking economic headlines, as it’s closely tied in with the economy, geopolitics, weather, and other matters that have large-scale implications.
It’s importance in the global economy contributes not only to its liquid trading environment but also to its volatility. Price can swing sharply up or down in response to an unforeseen event, like a storm, military conflict in an oil-producing region, or an economic crisis.
This combination of high-liquidity and high-volatility makes it a favorite instrument among many short-term futures traders. After all, liquidity inspires confidence that you can more easily get in or out of a contract at a favorable price. Volatility, on the other hand, indicates that price may actually go somewhere–up or down; it’s what makes price speculation trade-worthy.
So, how might someone buy or sell crude oil futures? Let’s walk through a few ways while brushing up on a few basics.
WTI Crude Is One of Two Global Oil Benchmarks
There are two global oil benchmarks: West Texas Intermediate (WTI) crude–a US benchmark and what we Americans just call “crude oil”–and Brent Crude, which is pumped out of the North Sea between the UK and Norway.
Among the two, the difference in futures liquidity is immense (at least in the CME), with crude oil not only far more liquid than Brent crude, but far more liquid than every other physical commodity in the exchange.
We’ll focus on WTI crude–or just “crude oil” for short.
What Moves Oil Prices?
As with all commodities, it’s supply and demand. So, what might you focus on each week? Two reports:
- Energy Information Administration (EIA) Petroleum Status Report; and
- American Petroleum Institute (API) Weekly Crude Oil Stock.
Both are statistical arms of the US Department of Energy. Both report the supply and demand conditions of crude oil. And both, especially the EIA report, have the capacity to send crude oil prices shooting higher or lower depending on how close the supply figures matched market expectations–whether it missed, matched, or topped consensus opinion.
So, if you plan on trading crude oil, don’t get T-boned by these reports. Keep an eye toward the fundamental conditions even if you’re using a more focused and tactical “technical analysis” approach to trading.
Remember: Although technicals show the outcomes of fundamental actions, unexpected fundamental news can often disrupt technical expectations.
How to Trade Crude Oil Futures
The Standard Crude Oil (CL) contract is the most liquidly traded crude oil futures contract among all.
- Each contract is equivalent to 1,000 barrels.
- Each tick–or minimum price fluctuation–of 0.01 a barrel will move $10.00.
- Though margins will vary according to FCM, remember that the full dollar risk you’re holding per contract is 1,000 x price of each contract.
The Mini Crude Oil (QM) contract is not as liquid as its standard counterpart.
- Each contract is equivalent to 500 barrels.
- Each tick–or minimum price fluctuation–of 0.025 a barrel will move $12.50.
- Though margins will vary according to FCM, remember that the full dollar risk you’re holding per contract is 500 x price of each contract.
This week, the CME group started offering Micro Crude Oil (MCL) contracts. This might be an opportunity for traders with smaller accounts to participate in the crude oil futures market.
Caveat: Because MCL is a new instrument, its liquidity will likely be lower until it’s adopted more widely among the traders–so be careful if you plan on trading this instrument upon its introduction into the market.
- Each contract is equivalent to 100 barrels.
- Each tick–or minimum price fluctuation–of 0.01 a barrel will move $1.00.
- Though margins will vary according to FCM, remember that the full dollar risk you’re holding per contract is 100 x price of each contract.
The Bottom Line
As a futures trader, you know that futures trading isn’t for everyone. Furthermore, crude oil trading isn’t for every futures trader. It’s always a good idea to educate yourself–not only technically but fundamentally–about the oil markets before jumping in to trade them. Given time, effort, and dedication, trading the crude oil market might be a good way to diversify your trades in other markets and commodity classes.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.