The Basics of Trading Crude Oil Futures
Crude oil is one of the better commodities to trade. It is a very active market and it is well known to investors around the world. There is usually no shortage of news to cause the price of oil to move from day to day. This presents many good trading opportunities, whether you focus on day trading futures or you are a longer-term trader or investor.
Crude oil is one of the most actively traded commodities in the world.
The price of crude oil affects the price of many other assets including stocks, bonds, currencies, and even other commodities. This is because crude oil remains a major source of energy for the world.
Crude Oil Contract Specs:
- Ticker Symbol: CL
- Exchange: NYMEX
- Trading Hours: 9:00 AM - 2:30 PM EST.
- Contract Size: 1,000 U.S. barrels (42,000 gallons).
- Contract Months: all months(Jan. - Dec.)
- Price Quote: price per barrel. Ex $65.50 per barrel
- Tick Size: $0.01 (1¢) per barrel ($10.00 per contract).
- Last Trading Day: Third business day prior to the 25th calendar day of the month preceding the delivery month. C
Cude Oil Fundamentals
- Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). "Light Sweet" is the most popular grade of crude oil that is traded. Another grade of oil is Brent Crude, which is primarily traded in London.
- Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and many other petrochemicals.
- Russia, Saudi Arabia, and the United States are the world’s three largest oil producers.
- When crude oil is refined or processed, it takes about 3 barrels of oil to produce 2 barrels of unleaded gas and 1 barrel of heating oil.
Crude Oil Reports
The main reports for crude oil are the EIA Weekly Energy Stocks report.
This report is released every Wednesday around 10:30 PM EST.
Tips on Trading Crude Oil Futures
- The prices of unleaded gas and heating oil can influence the price of crude oil.
- Demand is generally highest during the summer and winter months. A very hot summer or very active driving season (for summer vacations) can increase the demand for crude oil and cause prices to move higher.
- An extremely cold winter causes higher demand for heating oil, which is made from crude oil. This usually causes prices to move higher. Watch the weather in the Northeast, since it is the part of the country that predominately uses heating oil.
- Watch for oil production cuts or increases from OPEC.
Volatile Market for Crude Oil Futures
Crude oil can be a volatile market. Major news events can happen overnight and cause the price of oil to have wide swings. The same thing can happen throughout the day, whether it is due to an economic report or tensions in the Middle East. A tight supply situation can exacerbate price movement.
Supply and demand obviously dictate how the price will move, but this market often moves on emotion. Much of that comes from the unknown. If tensions escalate in the Middle East, there is no telling the extent of possible supply disruptions.
Traders will often react swiftly on the news and then sort it out later.
Price Movements for Crude Oil
The reason why prices move so swiftly is that traders who have short positions in the market tend to cover quickly. In order to do this, they have to place buy orders to cover. This wave of buying is done at the same time speculators are jumping on board to establish or add to long positions. The shorts will cover quickly because the risk is just too great if it is really a major development that could disrupt supplies.
The usual tendency is for oil prices to have a sharp spike higher on turmoil in the Middle East. Then prices calm down and start to move lower unless we start to see clear evidence of major supply disruptions. Identifying these waves of buying and selling are very important if you want to avoid getting whipsawed in the markets on emotions.
For the most part, crude oil tends to be a trending market. There is usually a major bias to the upside or downside. Trading from the trending side will certainly help improve your odds of success. Crude oil also tends to get stuck in prolonged ranges after a sizable move. If you can identify these ranges, there are plenty of opportunities to buy at the low end and sell at the high end. I like to trade the ranges until there is a clear breakout either way.
The value of the U.S. dollar is a major component in the price of oil. A higher dollar will put pressure on oil prices. A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tend to support higher oil prices. However, if oil prices move too high, it can stifle the economy. At this point, oil prices tend to move opposite the stock market. This usually becomes a concern when oil moves above $100.
Day Trading Crude Oil Futures
Crude oil is one of the favorite markets of futures day traders. The market typically reacts very well to pivot points and support and resistance levels. I like to play the bounces off these levels when I see more than one of these numbers at the same level. You have to make sure you use stops in this market, as it can make very swift runs at any given time. Long time energy trader, Mark Fisher, wrote an excellent book on day trading oil futures – The Logical Trader.
There is no shortage of trading opportunities in crude oil from day to day. The market is very active and it has plenty of volume. Beware of possible overnight moves that can take you by surprise. Much of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the E-mini S&P, you will probably like crude oil too.
Crude Oil Futures Trends
Crude oil entered a bear market in June 2014 when the price was just under $108 per barrel on the active month NYMEX crude oil futures contract. By February 2016, the price depreciated to under $30 per barrel.
Impact of Crude Oil Futures
Even if they do not trade or invest directly in crude oil, investors and traders all over the world follow the price of the energy commodity. When it comes to stock markets, there are so many companies involved in the exploration, production, processing, and servicing of the oil industry that moves in the price of crude oil effect major equity market indices around the world.
Crude oil affects debt markets for a number of reasons. Oil companies require vast sums of capital for production and other oil-related projects around the world. The amount of money lent by banks to the oil industry is significant. During slumps in the price of oil, defaults on oil-related loans have an important impact on the overall debt markets.
Additionally, many nations around the world depend on crude oil revenues; therefore, changes in the price of oil can directly affect government debt and currency levels in producing countries. When it comes to other commodities, energy is an important cost of goods sold a component of production. Therefore, the price of crude oil directly affects the production cost of other raw materials.
While consumers do not buy raw crude oil, petroleum products like gasoline, heating oil, diesel and jet fuel and others are basic necessities for individuals around the world on a daily basis. The price of crude oil has a direct impact on most people that inhabit the earth.
Crude oil futures, or derivatives, reflect the prices of the physical petroleum markets around the world. Understanding the physical flows of oil from producers to consumers is an imperative when it comes to being a knowledgeable trader or investor.