How To Trade Oil Futures

The global energy complex is a vast trading arena that accounts for billions of dollars in derivatives turnover on a daily basis. Whether one is interested in commodities such as natural gas and crude oil futures, or the gasoline and heating oil refinements, active traders have countless opportunities available.

What Is Crude Oil?

According to the U.S. Energy Information Administration (EIA), crude oil is "a mixture of hydrocarbons that exists in liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities."[1] The EIA also states that the primary purpose of crude oil is to be refined into a variety of petroleum products. Several of the most well-known products are heating oil, gasoline, diesel, lubricants, asphalt and jet fuels.

As with all commodities, crude oil is subject to quality control standards before it may be marketed. The quality of oil depends upon both its sulfur content and relative density.

Sulfur Content

Sulfur content is represented as the percentage of sulfur present in the oil. It ranges from 0.1% to 5.0%.[2] The amount of sulfur present in an oil reserve directly impacts its ability to be refined; oils with lower sulfur contents require fewer resources, while higher sulfur contents are more intensive. Crude oil with a sulfur content under 0.5% is considered "sweet," while stores above 0.5% are classified as "sour."

Density

The relative density of crude oil is quantified by the American Petroleum Institute (API) gravity scale. API gravity is measured by using a graduated cylinder-like tool known as a hydrometer. The hydrometer expresses density in terms of degrees, typically between 10° and 70°.[3]

In terms of oil production, the distinction between "sweet" and "sour" crude is a key aspect of desirability. Essentially, light, sweet crude is more desirable than heavy, sour crude because it is less resource-intensive to cultivate and refine. As a result, light, sweet crude oil prices are higher than lower-grade reserves as found in bituminous sands.

Trade the News: View our Economic Calendar

Two Benchmark Crude Oil Products

The world has two benchmark crude oil products: West Texas Intermediate (WTI) and North Sea Brent (Brent). Both are considered to be light, sweet grades and they're deliverable according to the EIA's specifications:[1]

  • West Texas Intermediate must have 0.42% sulfur content or less and fall between 37° and 42° API gravity.
  • North Sea Brent crude oil must have 0.42% sulfur content or less and fall between 34° and 42° API gravity.

Why Trade Crude Oil Futures?

A crude oil futures contract is a legally binding agreement that outlines the purchase, sale and delivery of a specific quantity of oil. It is constructed with respect to a designated price on a predetermined date in time. For financial market participants, there are three primary reasons to trade crude oil futures: liquidity, volatility and leverage.

Liquidity

The crude oil market is extremely deep and trades with consistently heavy volumes. In fact, the CME Group lauds its West Texas Intermediate product for being the "world's most liquid oil contract." This statement is largely due to WTI crude oil having an average daily traded volume of approximately 1.2 million contracts.[4] Due to this liquidity, participants enjoy tighter bid/ask spreads and reduced slippage compared to thinner markets.

Volatility

The price of oil depends on a variety of factors including geopolitics, the strength of currencies and current levels of supply and demand. Given this collection of diverse underpinnings, price fluctuations are consistently larger than those of other asset classes.

Although traditional finance sees it as "high risk," the enhanced volatility is ideal for intraday, day and swing trading strategies. Also, the steady price movements are attractive to institutional hedge funds and retail speculators alike.

Leverage

Many oil traders seek to boost their capital efficiency through the application of enhanced leverage. Simply put, futures traders are able to allocate a small amount of risk capital to controlling much larger positions in the open market. If used properly, high degrees of leverage can exponentially increase the trader's return on investment (ROI) and capital efficiency[!].

! - Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

Compared to other securities, crude oil futures contracts have vastly reduced margin requirements. For instance, the maintenance margin requirements of WTI typically run in the neighborhood of 5% of the contract's notional value.[5] Additionally, day trade margins are lower.

Crude Oil Futures Contracts

In the realm of commodity futures, the oil market features several of the most popular contracts. These listings include the WTI, E-mini WTI, Micro WTI and Brent crude oil futures contracts. Each product furnishes energy market participants with a vast array of unique opportunities.

West Texas Intermediate (WTI) Futures

The benchmark of the North American oil market is the West Texas Intermediate (WTI) futures contract. First launched by the New York Mercantile Exchange (NYMEX) in 1983, WTI futures are the world's most liquid oil futures contract.[6] Also, WTI futures are the basis for international offerings of the USOIL contract-for-difference product.

Since the CME Group's 2008 acquisition of the NYMEX, WTI is available for trade on the Chicago Mercantile Exchange's (CME) Globex electronic market. Below is a look at the contract specs:[7]

  • Symbol: CL
  • Market: CME Globex
  • Contract Size: 1,000 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Minimum Tick: US$0.01 per barrel
  • Tick Value: US$10.00 per tick
  • Contract Month: Monthly contracts listed for the current year, subsequent 10 years and two contract months.
  • Settlement: Physical delivery
  • Trading Hours Sunday through Friday from 6:00 PM EST to 5:00 PM EST (daily 60-minute break from 5:00 PM EST to 6:00 PM EST)

E-mini WTI Crude Oil Futures

Based on the full-sized WTI contract, E-mini WTI futures are listed for trade on the CME Globex exchange. CME E-mini WTI futures are traded exclusively in the digital format, with minimal liquidity. Compared to full-sized WTI, the E-mini WTI issue has an average daily trading volume measured in the thousands of contracts, not millions.[8]

However, some traders find the E-mini WTI suitable because of its reduced size and unique pricing. Below are the contract specs:[9]

  • Symbol: QM
  • Market: CME Globex
  • Contract Size: 500 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Minimum Tick: US$0.025 per barrel
  • Tick Value: US$12.50
  • Contract Month: Monthly contracts are listed for the current year and subsequent five calendar years.
  • Settlement: Financial
  • Trading Hours: Sunday through Friday from 6:00 PM EST to 5:00 PM EST. (Daily 60-minute break from 5:00 PM to 6:00 PM EST)

Micro WTI Futures

For retail energy futures market participants, the CME Micro WTI contract is exceedingly attractive. The smaller size and strong liquidity affords participants an array of strategic alternatives. With a market price that mimics full-sized WTI, the Micro listing is a preferred way for retail traders to fully customise their energy market exposure.

Launched in July 2021, CME Micro WTI traded volumes quickly grew in popularity. Within the first month of listing, Micro WTI futures exceeded 1 million contracts traded.[10] Below is a look at the contract specs:[11]

  • Symbol: MCL
  • Market: CME Globex
  • Contract Size: 100 barrels
  • Denomination: U.S. dollars and cents
  • Minimum Tick: US$0.01 per barrel
  • Tick Value: US$1.00 per tick
  • Contract Month: Monthly listed for 12 consecutive months and an additional June and December
  • Settlement: Financial
  • Trading Hours: Sunday through Friday, 6:00 PM - 5:00 PM EST. (60-minute break 5:00 PM - 6:00 PM EST)

ICE North Sea Brent Futures (Brent)

Available for trade on the Intercontinental Exchange (ICE), North Sea Brent (Brent) crude oil futures are the benchmark for international oil. Physically, Brent is a blend of light, sweet crude from a collection of North Sea oil streams. The featured production regions are the Forties, Ekofisk, Oseberg and Troll.[12] For forex CFD traders, Brent is the basis for UKOIL.

The futures price and spot price of Brent are viewed as reflecting global demand, specifically from Europe and Asia.[12] Although the CME Group does offer a Brent futures contract (BZ), the premier product is listed on ICE. Below are the contract specs for ICE Brent futures:[13]

  • Symbol: B
  • Market: ICE
  • Contract Size: 1,000 barrels
  • Denomination: U.S. dollars and cents
  • Minimum Tick: US$0.01 per barrel
* Tick Value: US$10.00 per tick
  • Contract Month: Monthly, up to 96 consecutive months
  • Settlement: Physical delivery with option to cash settle
  • Trading Hours: Monday through Friday, 8:00 PM EST to 6:00 PM EST.(Daily halt from 6:00 PM to 7:45 PM EST)

Trading Crude Oil Futures

To start trading crude oil futures, you must first complete several tasks. Before diving in with both feet, one is well-advised to select the right contract, secure the services of a broker, and become familiar with the key oil market drivers.

Choosing The Right Contract

If you have any experience with stocks, exchange-traded funds (ETFs) or options trading, then you're familiar with the enormity of the financial markets. Conversely, there aren't too many alternatives when it comes to trading crude oil futures. However, the following factors can help you pick the best contract for the job:

  • Exposure: An important aspect of selecting an ideal contract is whether you intend to trade the North American or global oil market. For those interested in addressing the U.S. economy and energy production, consider WTI futures. If you have an international focus, check out North Sea Brent.
  • Capitalisation: For average retail traders, the higher tick values and margin requirements of full-sized Brent and WTI may be expensive. If your risk capital is limited, the E-mini WTI or Micro WTI contracts are better fits. In the case of the Micro WTI, maintenance margins are around US$500 per contract and day trade margins are lower.[14]

Finding A Broker

In order to trade futures, you must have access to the market. Therefore, it's necessary to secure the services of a futures broker.

The online space is filled with hundreds of brokers, each vying for your business. Unfortunately, not all brokers are the same. To have the best shot at successfully trading crude oil futures, select a broker with the following qualities:

  • Reputable: A lengthy, positive track record of customer service is highly recommended.
  • Licensed: Unlike over-the-counter (OTC) products, futures contracts are exchange-traded. This means that your broker must be licensed and in good legal standing before conducting business.
  • Technologically Proficient: It's critical that your broker supports one or more robust software trading platforms. No matter if you scrutinise market fundamentals or rely on technical analysis, a powerful software suite is invaluable for remote futures trading. A few vital platform features are charting, multiple order-entry options and a catalogue of technical indicators.

Key Market Drivers

Astute market participants understand the key underpinnings of the products they trade. Crude oil futures are no different—they have a distinct collection of market drivers that can prompt price fluctuations:

  • Supply & Demand: Like all commodity futures, evolving levels of supply and demand have a residual impact on oil prices. North American fracking oil production, seasonal demand for refined fuels and OPEC policy are three major factors that influence supply and demand.
  • Strength Of The U.S. Dollar (USD): Regardless of where oil is being bought or sold, business is conducted via the petrodollar system. Accordingly, oil in the U.S., U.K., Saudi Arabia or anywhere is priced in terms of U.S. dollars. Thus, during periods of USD devaluation, the price of oil typically rises. On the other hand, when the USD strengthens vs the forex majors, prices normally fall.

Summary

The enormity of the global oil complex (US$2806.9 million, 2021)[15] ensures ever-present public interest in crude oil futures. Crude oil futures attract a wide range of market participants spanning from small retail traders to the largest oil companies in the world.

The benchmark derivatives products for crude oil are based on the light, sweet West Texas Intermediate (WTI) and North Sea Brent (Brent) blends. Featured contracts are the NYMEX WTI listings found on the CME and ICE's Brent crude.

To start trading on these exciting markets, one needs to select a suitable contract, find a broker and learn how the key market drivers influence pricing. Upon doing so, one can capitalise on the consistent liquidity and volatility of crude oil futures.

Please refer to our Product Guides to see full product parameters.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

References

1

Retrieved 09 Dec 2021 https://www.eia.gov/dnav/pet/TblDefs/pet_pri_fut_tbldef2.asp

2

Retrieved 09 Dec 2021 https://www.e-education.psu.edu/fsc432/content/sulfur-and-nitrogen-content

3

Retrieved 09 Dec 2021 https://glossary.oilfield.slb.com/en/terms/a/api_gravity

4

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.html

5

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.margins.html

6

Retrieved 09 Dec 2021 https://www.reuters.com/article/us-ice-nymex-factbox/factbox-nymex-and-ices-long-standing-rivalry-idUSTRE5AT3GF20091130

7

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.contractSpecs.html

8

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/emini-crude-oil.volume.html

9

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/emini-crude-oil.contractSpecs.html

10

Retrieved 09 Dec 2021 https://www.prnewswire.com/news-releases/micro-wti-crude-oil-futures-surpass-1-million-contracts-traded-301350659.html

11

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/micro-wti-crude-oil.contractSpecs.html

12

Retrieved 09 Dec 2021 https://www.cmegroup.com/education/courses/introduction-to-crude-oil/brent-crude-product-overview.html

13

Retrieved 09 Dec 2021 https://www.theice.com/products/219/Brent-Crude-Futures

14

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/energy/crude-oil/micro-wti-crude-oil.margins.html

15

Retrieved 01 Jul 2022 https://www.marketreportsworld.com/global-crude-oil-market-18476264

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses exceeding deposited funds, if you are a professional client. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}