Trading Crude Oil Futures

Trading Crude Oil Futures

So you’re interested in trading crude oil futures, huh? Well, there’s a few things you’ll need to know before you tackle this behemoth of a market. First of all, the futures markets are known for being extremely volatile for the most part, and honestly, trading any type of futures contract is not for the faint-hearted. The main reason why is because of the two-edged sword known as leverage. The leverage afforded by the average futures contract can be a huge blessing if the market moves in your favor, and an absolute nightmare if it moves against you. There’s a piece of literature that most futures brokers give you in their account application paperwork, and the title goes something like “The Effects of Leverage or Gearing”—I forgot the exact title, but it’s something along those lines. I highly recommend that any aspiring crude oil trader (or any other derivatives trader for that matter) read that piece of literature and really take it to heart. Nobody is a superman in these markets; you have to trade with discipline and a money management approach that’s very conservative, if you plan on lasting in these markets. But on to crude oil itself. It’s actually known as “Light Sweet Crude”, which is somewhat humorous to me, as it sounds like some kind of diet drink or whatever. The symbol for Crude is CL, and it is traded on the CME Group (which is one of the world’s largest derivatives marketplaces) through their Globex platform as well as in the open-outcry format. Each futures contract represents 1,000 barrels of crude oil, so for an example, if crude oil was trading at $50.00 a barrel (yeah, we wish), then each futures contract would represent $50,000 worth of crude oil. That’s a whale of a lot of “Texas Tea”! As of this writing (and it may actually change soon), the price of crude oil is quoted in U.S. Dollars and Cents. The cool thing is if the price of crude goes up by just one cent—in other words, from $50.00 to $50.01—you have just gained $10.00 on your futures contract. This one-cent move is also called a “tick”, and since in our example the price went up, it would be considered an “uptick”. So the “tick value” for crude oil is $10.00. In other words, that’s the minimum price fluctuation that can be made when trading crude oil futures contracts. The downside to this situation is that just as crude prices can go higher, and with every one cent they move up, you make ten bucks, they can also go lower, and in that case, every one cent that crude goes down, you would lose ten bucks. This is to assume that you’re going long (i.e., buying) a crude futures contract. Actually, if you’re shorting crude (i.e., selling), then any downtick would be in your favor, and you would actually make ten bucks every time the market dropped a cent. If any of this seems confusing (and it should if you’re a beginner), I highly recommend that you read up on the basics of futures trading, and you can check out several of my other hubs, including one I did about going short and going long.

Image courtesy of Google Images
Image courtesy of Google Images

Crude Oil Futures Trading

Now as for the factors that move crude oil prices, that’s a whole other subject altogether. As of this writing, I think it would be wise to be bullish long-term on crude, primarily because it will be in such high demand in the coming decades, especially with powerhouse economies like India and China adopting more of a consumerist lifestyle. Just think about it: China was once an oil exporter, but now due to their exploding economy, they have become one of the top importers of oil in the world. Although I believe that the fundamentals are solid to call crude at a bull market in the coming years, there are so many geopolitical factors driving the price of crude oil that it’s hard to nail down exactly what moves price. I can say this, though…it seems like anytime someone sneezes over in Saudi Arabia, it means our oil prices shoot through the roof. Not only do you have to be concerned about Middle East instability, but then also we have a new enemy to the “small trader” in the large commercial banks that have been able to heavily speculate in commodities since the Glass-Steagall Act was dismantled in the late 90’s. This alone—NOT supply and demand fundamentals—was the reason for the ridiculous spike in crude oil prices in the summer of 2008 (remember $4.50 gas?) So while it’s definitely not impossible to make money by trading crude oil futures, you really need to enter the market with a mindset of sound trading discipline; otherwise, it could be curtains for you, my friend. But at the end of the day, trading crude oil futures is really no different than trading any other type of futures contract, whether it’s Wheat, Orange Juice, or anything similar—they all have their respective tick values, and they all can be powerfully leveraged for gain, or mishandled for some hardcore losses. I know that this was a very quick and simple primer on crude oil trading, so if you want more info, avail yourself to the CME Group’s website (listed below in the “Links” section).

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