The Basics of Trading Crude Oil Futures

Active and volatile, with opportunities for day trading and long-term investing

what to know when getting into crude oil trading

The Balance / Julie Bang

Crude oil is one of the most actively traded commodities in the world, and its price affects those of many other commodities, including gasoline and natural gas. However, the ripple effect of crude oil prices also impacts the prices of stocks, bonds, and currencies around the globe. It remains a major source of energy for the world, despite increased interest in the renewable energy sector.

Crude oil is one of the better commodities to trade on a futures contract, because the market is incredibly active, and it is well known to traders around the world. Oil prices fluctuate on the faintest whisper of news regarding pricing, which makes it a favorite of swing and day traders who are looking for an edge. This volatile environment can provide some solid trading opportunities, whether your focus is on day trading futures or longer-term trading. It can also cause heavy losses if you are on the wrong side of a price movement.

Key Takeaways

  • Crude oil is one of the most actively traded commodities in the world, and it remains a major source of energy despite increased interest in renewable energy.
  • Traders are advised to understand the futures market. Many of the same principles that apply to stock index futures also apply to crude oil futures.
  • Major news events can cause oil prices to swing unpredictably and widely.
  • Crude oil tends to get stuck in prolonged ranges after a sizable move. A person who can identify these ranges has plenty of opportunities to buy at the low end and sell at the high end.

Crude Oil Fundamentals

Crude is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel, and many other petrochemicals. It comes in many different grades, and the fundamentals are different because it is a raw product. Light, sweet crude oil is the most popular grade of crude oil being traded, because it is the easiest to distill into other products, and it is traded on the New York Mercantile Exchange (NYMEX). Brent Blend Crude is another grade of oil that is primarily traded in London and seeing increased interest. Russia, Saudi Arabia, and the United States are the world's three largest oil producers. Brent is the most widely used benchmark for determining gasoline prices.

West Texas Intermediate (WTI) is crude from U.S. wells. The product is ideal for gasoline, and it trades under the CL ticker on the Chicago Mercantile Exchange (CME). The NYMEX Middle Eastern crude is known as Dubai and Oman oil. It has a higher sulfur content and falls into the category of heavy, sour oil. The Dubai Mercantile Exchange offers futures for this crude. When crude oil is refined or processed, it takes about three barrels of oil to produce two barrels of unleaded gas and one barrel of heating oil. These figures help to put into perspective the production needs of crude, and why production and supply levels are watched so closely.

The main reports for crude oil are found in the U.S. Energy Information Administration (EIA) Weekly Energy Stocks report. This report is released every Wednesday around 1 p.m. Eastern time.

Crude Oil Contract Specs

Trading crude can be confusing when you start. Try to memorize these specifications before you begin:

  • Ticker symbol: CL
  • Exchange: NYMEX
  • Trading hours: 6 p.m. to 5 p.m. ET
  • Contract size: 1,000 U.S. barrels (42,000 gallons)
  • Contract months: All months
  • Price quote: Price per barrel (example: $65.50 per barrel)
  • Tick size: $0.01 per barrel ($10.00 per contract)
  • Last trading day: The third business day before the 25th calendar day of the month preceding the delivery month

Traders should also understand the futures market. When you trade a futures contract, you must either buy or sell—"call" or "put"—the commodity by the expiration date at the stated price. If you hold a call, the only way to avoid actually having to take physical delivery of 1,000 barrels of crude oil is to offset the trade before the expiration. Trading futures is not recommended for novice investors.

Tips on Trading Crude Oil Futures

When tracking price movement and making trades, remember that 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, but for different reasons. During the summer, increased driving boosts the demand for crude oil and causes prices to rise. During the winter, a higher demand for heating oil causes prices to move higher. Watch the weather in the Northeast, since it's the part of the country that uses heating oil more than any other, and watch for oil production cuts or increases from the Organization of Petroleum Exporting Countries (OPEC), which determines global supply and demand for crude.

Volatile Market for Crude Oil Futures

Major news events can happen overnight, causing oil prices to swing unpredictably and widely. The same thing can happen throughout the day, since crude futures trade around the clock. Whether it's an economic report or tensions in the Middle East, a tight supply situation can exacerbate price movement. Supply and demand dictate how prices move, but the market moves on emotion as well, especially with retail investors who day trade. If tensions escalate in the Middle East, there's no telling what the extent of possible supply disruptions could be, and traders often react swiftly on the news, adjusting their strategies following price fluctuations.

One recent event that caused the price of crude oil to skyrocket was Russia's invasion of Ukraine. In February 2022, crude oil began trading above $100 per barrel, its highest price since 2014.

Price Movements for Crude Oil

The reason prices move so swiftly is that traders who have short positions in the market tend to cover their shorts quickly if the price creeps up, either eroding their gains or causing losses. To do that, 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 a major development arises that disrupts supply, shorts could theoretically lose more money than they invested, resulting in a margin call from their brokerage—one of the most dreaded calls in the world of investors.

For the most part, crude oil tends to be a trending market, primarily driven by psychological movement, and there's usually a major bias to the upside or downside. Trading from the trending side will help improve your odds of success, though. Crude oil also tends to get stuck in prolonged ranges after a sizable move, and a person who can identify these ranges has plenty of opportunities to buy at the low end and sell at the high end.

Some investors trade the ranges until there's a clear breakout either way.

The value of the U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices; a lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market, but in the opposite direction. A growing economy and stock market tend to support higher oil prices, but prices that are moving too high can stifle the economy. This trend becomes a concern when oil prices approach the psychological price marker of $100 a barrel.

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. Stop orders are automatically triggered that can help reduce the high risk of a market that can make very swift runs—up or down—at any given time. You have to make sure you use stop orders in this market. Many 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'll 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 had depreciated to less than $30 per barrel, and in January 2019, the price was trending around $53.84 per barrel for WTI Crude. Due in part to the Russia–Ukraine conflict, as of March 2022, the price was hovering around $110 per barrel.

Frequently Asked Questions (FAQs)

How do I buy oil futures?

Trading futures isn't the same as trading stocks. You'll need a specialized account with a brokerage that offers futures trading. Each broker sets the standard for what you need to open a futures trading account, but you can expect to need a few thousand dollars of starting capital. Once you have access to the futures trading market, you can place trading orders much as you would with stocks or ETFs.

What does it take to become a successful oil futures trader?

Successful oil traders share traits with successful active traders in all markets. They need the discipline to develop, test, and stick to a successful strategy. They need the patience to wait for trades to come to them. They need to be adaptable and forward-thinking so they can update strategies as markets change. They need mental toughness to withstand losing streaks, and independence to avoid relying on a specific service or mentor.

Article Sources

  1. U.S. Energy Information Administration. "What Drives Crude Oil Prices?"

  2. U.S. Energy Information Administration. "Oil Prices and Outlook."

  3. U.S. Energy Information Administration. "Use of Oil."

  4. U.S. Energy Information Administration. "Crude Oils Have Different Quality Characteristics."

  5. U.S. Energy Information Administration (EIA). "What Countries Are the Top Producers and Consumers of Oil?"

  6. U.S. Energy Information Administration. "What Is the Difference Between Crude Oil, Petroleum Products, and Petroleum?"

  7. U.S. Energy Information Administration. "Benchmarks Play an Important Role in Pricing Crude Oil."

  8. U.S. Energy Information Administration. "Refining Crude Oil."

  9. U.S. Energy Information Administration. "This Week in Petroleum."

  10. CME Group. "Crude Oil Futures Contract Specs."

  11. U.S. Commodity Futures Trading Commission. "Futures Market Basics."

  12. U.S. Energy Information Administration. "Energy & Financial Markets: What Drives Crude Oil Prices."

  13. Trading Economics. "Crude Oil."

  14. U.S. Bureau of Labor Statistics. "Beyond the Numbers: The Relationship Between Crude Oil Prices and Export Prices of Major Agricultural Commodities."

  15. CME Group. "Futures Order Types."