Energy CFDs: A Look At UKOIL And USOIL

Commonly referred to as the economic lifeblood of a nation, crude oil is a sought-after commodity and popular mode of trade. The global oil markets are premier destinations for traders and investors the world over. Featuring robust liquidity and consistent volatility, oil is an ideal product for individuals interested in capitalising on long- or short-term fluctuations in pricing.

While determining crude oil’s relative value may be complex, trading it on the open market is not. Crude oil is readily available via futures, options and contract-for-difference (CFD) products. However, no matter which type of instrument one is trading, there are two primary benchmarks by which crude oil values are measured:

  • West Texas Intermediate (WTI) Crude Oil
  • North Sea Brent (Brent) Crude Oil

Until the introduction of the petroyuan in early 2018, WTI and Brent futures were among the only means of hedging or speculating on the future value of oil. Although new products may rival WTI and Brent sometime in the future, each is still viewed as a prominent method of engaging crude oil derivatives.

CFD: A Unique Method Of Trading Crude Oil

In contrast to standardised futures, CFD products are traded in an over-the-counter (OTC) capacity, similar to forex currency pairings. They are offered on a variety of commodities including precious metals, agricultural products and energies.

The function of a commodity CFD is relatively straightforward. Most commodities are traded on a futures exchange in the form of a standardised contract. A CFD product is priced relative to the corresponding commodity futures contract. In the event that the value of the underlying commodity rises or falls on the futures markets, the pricing of the CFD follows within a few pips.

While a majority of institutional participants prefer engaging the traditional crude oil futures markets, retail traders are often attracted to CFDs for several reasons:

  • Variable Leverage: The trade of a standard oil futures contract has a considerable margin requirement due to the extreme value of the underlying asset’s quantity. Oil CFDs may be traded using leverage of up to 200:1*, needing only a fraction of the margin.
  • Overnight Positioning: In futures, an additional maintenance margin is required to carry an open position through the daily electronic close. Oil CFDs can be held without interruption or the deposit of extra capital until the base contract reaches its expiration date.
  • Spreads/Commissions: When trading CFDs, exchange fees, clearing fees and standard commissions are avoided. The cost of doing business is exclusive to the bid/ask spread.
  • No Physical Delivery: In the event that a standardised oil futures contract remains open at its expiration date, the holder is obligated to take physical delivery of the underlying asset. CFD products are settled financially, eliminating any chance of the trader ever assuming delivery.

Alongside gold, crude oil is one of the most popular CFDs traded on a daily basis. However, crude oil CFDs are based on the pricing of futures contracts, while those of gold are based on values from the spot market. This adds an extra incentive to the trade of oil CFDs, as they are not liable for costs associated with rollover.

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USOIL

USOIL is a CFD product based upon the pricing of the West Texas Intermediate (WTI) futures contract. WTI crude oil futures are traded on the New York Mercantile Exchange (NYMEX) and accessible through the Chicago Mercantile Exchange (CME) Globex electronic platform.

WTI is the global standard for the highest grade of oil: light sweet crude. It’s stored and distributed in Cushing, Oklahoma. The contract specifications for WTI crude oil futures are as follows:

  • Symbol: CL
  • Contract Size: 1,000 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Settlement: Physical delivery1)Retrieved 25 April 2018 http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html

USOIL reflects the market activity of WTI crude futures within a few cents at any given time. Albeit a different variety of financial instrument, USOIL enables retail traders to engage WTI crude on a more manageable scale. The specifications for the USOIL CFD are as follows:

  • Symbol: USOIL
  • Contract Size: 10 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Settlement: Financial2)Retrieved 25 April 2018 https://www.fxcm.com/uk/commodities/underlying-markets/

USOIL offers an affordable alternative to the trade of WTI crude futures. The limited contract size and financial settlement enable retail traders of all types to become active in one of the world’s most popular commodity markets.

UKOIL

UKOIL is a CFD product that is based on the international standard for oil valuations, North Sea Brent (Brent) crude. Brent crude is widely viewed as being representative of pricing in Europe, Asia, Africa and the Middle East.3)Retrieved 25 April 2018 https://institute.cmegroup.com/products/CL Brent is a “seaborne” oil grade, meaning production takes place in an offshore capacity. It’s classified as being a high quality, light, and low-sulfur blend of crude oil.4)Retrieved 25 April 2018 http://corporate.exxonmobil.com/en/company/worldwide-operations/crude-oils/brent-blend

Brent crude futures are traded electronically on the Intercontinental Exchange (ICE) Europe. The contract specifications for Brent are as follows:

  • Symbol: B
  • Contract Size: 1000 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Settlement: Physical Delivery5)Retrieved 25 April 2018 https://www.theice.com/products/219/Brent-Crude-Futures/specs

The UKOIL CFD product follows the Brent crude futures contract relatively closely. In the event that there is a substantial market move, UKOIL reflects the sentiment. The specifications of UKOIL are as follows:

  • Symbol: UKOIL
  • Contract Size: 10 barrels
  • Denomination: U.S. dollars and cents per barrel
  • Settlement: Financial6)Retrieved 25 April 2018 https://www.fxcm.com/uk/commodities/underlying-markets/

In the same fashion as USOIL, UKOIL gives retail participants the ability to engage the Brent crude markets in a manner that is far less capital intensive.

Summary

International crude oil markets are rapidly evolving atmospheres. Geopolitics, supply disruptions, conflict or acts of terror can have dramatic impacts upon valuations. With so many fundamental market drivers, volatility and liquidity are constant aspects of the market dynamic.

Trading outright futures on oil products requires significant capital resources. CFD products offer a manageable alternative. Through the trade of USOIL and UKOIL, aspiring energies market participants are able to become involved the global oil marketplace.

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

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided 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. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]

1. Retrieved 25 April 2018 http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
2, 6. Retrieved 25 April 2018 https://www.fxcm.com/uk/commodities/underlying-markets/
3. Retrieved 25 April 2018 https://institute.cmegroup.com/products/CL
4. Retrieved 25 April 2018 http://corporate.exxonmobil.com/en/company/worldwide-operations/crude-oils/brent-blend
5. Retrieved 25 April 2018 https://www.theice.com/products/219/Brent-Crude-Futures/specs