Crude Oil Futures Trading Basics

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The Basics of Trading Crude Oil Futures

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Crude oil is one of the better commodities on which to trade futures contracts. 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 looking for an edge.

This volatile environment can provide some solid trading opportunities, whether your focus is on day trading futures or you are a longer-term trader. It may also provide great losses if you are on the wrong side of a price movement.

Crude oil is also one of the most actively traded commodities in the world.   The price of crude oil affects the price of many other commodities, including gasoline and natural gas. However, the ripple effect of crude oil prices also impacts the price of stocks, bonds, and currencies around the globe. 

Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector. 

Crude Oil Contract Specs

Trading crude can be confusing when you first get into it, and you should memorize these specifications before you consider beginning to trade. 

  • Ticker symbol: CL
  • Exchange: NYMEX
  • Trading hours: 9:00 a.m.–2:30 p.m. ET
  • Contract size: 1,000 U.S. barrels (42,000 gallons).
  • Contract months: All months (Jan.–Dec.)
  • Price quote: Price per barrel (example: $65.50 per barrel)
  • Tick size: $0.01 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

Traders are also advised to understand the futures market. When you trade a futures contract you have the obligation to 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 10,000 barrels of crude oil is to offset the trade before the expiration. Trading futures is not for the novice. 

Crude Oil Fundamentals

Despite using it every day, not many people know the differences between crude oil and gasoline. Crude is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel, and many other petrochemicals. The fundamentals are different since it is a raw product. Crude also comes in many different grades. 

Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). “Light Sweet” is the most popular grade of crude oil being traded because it is the easiest to distill into other products. 

Another grade of oil is Brent Blend Crude, which is primarily traded in London and is seeing increased interest. Russia, Saudi Arabia, and the United States are the world’s three largest oil producers as of 2020.   Brent is the most widely used benchmark for determining gasoline prices. 

West Texas Intermediate (WTI) is crude from U.S. wells. The product is light and sweet and ideal for gasoline. It trades under the CL ticker on the Chicago Merchantile Exchange (CME) and 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.

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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.   This helps to put into perspective the production needs of crude, and why production and supply levels are watched so closely.

Crude Oil Reports

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 1:00 p.m. ET, with traders eagerly awaiting its arrival. 

Tips on Trading Crude Oil Futures

Oil futures are notorious for their volatility. Here are some quick tips that you should look for when tracking price movement and making trades:

  • The price of unleaded gas and heating oil can influence the price of crude oil.
  • Demand is generally highest during the summer and winter months. 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 a 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’s the part of the country that uses heating oil more than any other.
  • Watch for oil production cuts or increases from OPEC (Organization of Petroleum Exporting Countries), which determines global supply and demand for crude. 

Volatile Market for Crude Oil Futures

Crude oil often trades in a volatile environment. 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 obviously dictate how the price will move, but this market moves on emotion as well, especially with retail investors who day trade.

If tensions escalate in the Middle East, there’s no telling the extent of possible supply disruptions, and traders often react swiftly on the news, adjusting their strategy following price fluctuations.

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 price creeps up, either eroding their gains or causing losses. 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 a major development arose that disrupted 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.

The usual tendency is for oil prices to spike on news of turmoil in the Middle East. Then prices calm down and start to move lower unless there’s irrefutable evidence of major supply disruptions. Identifying these waves of buying and selling is very important if you want to avoid getting a haircut in the financial markets.

For the most part, crude oil tends to be a trending market, driven largely by psychological movement. There’s 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. 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. A growing economy and stock market tend to support higher oil prices. However, oil prices moving too high can stifle the economy. Historically, oil prices tend to move opposite the stock market. 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. You have to make sure you use stops orders in this market. Stop orders are automatically triggered trades that can help reduce the high risk of a market that can make very swift runs—up or down—at any given time.   Longtime energy trader Mark Fisher wrote an excellent book on day trading oil futures titled The Logical Trader.

There’s no shortage of trading opportunities. Most traders close their position end-of-day (EOD) to ensure they sleep at night, considering overnight volatility.

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 entered a bear market in June 2020 when the price was just under $108 per barrel on the active month NYMEX crude oil futures contract. By February 2020, the price depreciated to under $30 per barrel. In January 2020, the price was trending around $53.84 per barrel for WTI Crude. As of December 27 2020, the price is on the rise at $61.72 per barrel. 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Crude Oil Futures Trading Basics

Crude Oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil (eg. 1000 barrels) at a predetermined price on a future delivery date.

Crude Oil Futures Exchanges

You can trade Crude Oil futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Light Sweet Crude Oil futures prices are quoted in dollars and cents per barrel and are traded in lot sizes of 1000 barrels (42000 gallons).

NYMEX Brent Crude Oil futures are traded in units of 1000 barrels (42000 gallons) and contract prices are quoted in dollars and cents per barrel.

TOCOM Crude Oil futures prices are quoted in yen per kiloliter and are traded in lot sizes of 50 kiloliters (13210 gallons).

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Light Sweet Crude Oil Futures
(Price Quotes)
CL 1000 barrels
(Full Contract Spec)
USD 9,113 (approx. 23%)
(Latest Margin Info)
NYMEX Brent Crude Oil Futures
(Price Quotes)
BZ 1000 barrels
(Full Contract Spec)
USD 12,825 (approx. 29%)
(Latest Margin Info)
TOCOM Crude Oil Futures
(Price Quotes)
50 kiloliters
(Full Contract Spec)
JPY 210,000 (approx. 17%)
(Latest Margin Info)

Crude Oil Futures Trading Basics

Consumers and producers of crude oil can manage crude oil price risk by purchasing and selling crude oil futures. Crude Oil producers can employ a short hedge to lock in a selling price for the crude oil they produce while businesses that require crude oil can utilize a long hedge to secure a purchase price for the commodity they need.

Crude Oil futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable crude oil price movement. Speculators buy crude oil futures when they believe that crude oil prices will go up. Conversely, they will sell crude oil futures when they think that crude oil prices will fall.

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Basics of Trading Crude Oil Futures Contracts

Last updated on February 13th, 2020

Trading Crude oil futures is a market that when it comes to day trading, is my top pick.

For years now, it has offered enormous profit opportunity due to its highly active price action and range.

As dynamic as this market is, there are aspects that are important to be aware of if you want to succeed at crude oil futures trading.

Crude oil futures, and more specifically, ‘light sweet crude oil futures’ are traded on the NYMEX Exchange (New York Mercantile exchange). The trade pit opens at 9 am est and trades until 2:30 pm, but there is also a very active electronic market which trades on globex from 6 pm est, Sunday through Friday.

Like all major commodities futures contracts, crude oil futures contracts are standardized.

The front month contract is what we want to focus on because that is where the majority of the volume is.

  • Each contract consists of 1,000 barrels.
  • The prices move in 1 tick increments.
  • Each tick is equal to .01, or one cent, US.
  • Therefore the value of each tick is $10, making very small moves in price a very lucrative and/or risky proposition.

For example, if one were to trade a single contract of crude oil futures that moves just .10 in price, $100 would be made or lost, plus trade costs (commission, exchange fees and slippage).

Crude Oil Contract Rollover

Each month, around the 18 th , or the closest Friday to the 18 th , we typically ‘roll’ to the next front month contract.

During the Thursday and Friday around these monthly dates, you will notice the trade volume begins to migrate from the old month to the new.

We always want to focus our trading on the contract with the most trade volume.

There are also mini contracts of crude oil futures traded on the CME. At first appearance, you might be drawn to these because they require much smaller capital levels to safely trade.

The only problem is that most traders have not really taken to these smaller contracts and the trade volume is just not sufficient for us to attempt trading these products.

Focus on the full size NYMEX contract for better trading.

I have personally called live trades in a virtual trade room for many years and crude oil futures has been one of the best, most consistently active markets that I have focused on throughout my trade room experience.

Because of this price action, we can look forward to lots of great trade opportunities.

How To Trade Crude Oil Futures

All the best strategies that I have found the most success with, are rule based methods that tend to focus on momentum style trade setups, or reversal trades.

They are very controlled, with specific targets, entries and stops.

For me, the best strategies utilize multiple positions and for that, you do have to be adequately capitalized. If not, then begin with a single position and trade it to a specific target.

With two positions, which is my preferred method, I like to exit at a specific target with one position, and then trail the 2 nd position per my trade plan rules and techniques.

I also like to move my stop to lock in a little profit or to eliminate the risk on the trade as quickly as possible, also per the rules and techniques of my trade plan.

Your trade plan should also be quite specific as to when to start each session and when to quit. This is the kind of market that you probably do not want to over trade.

My Personal Trading Plan Is As Follows

I begin at 8:50 am each session.

My quitting goals are dynamic and typically require one or two winning trades and a positive result.

If the session begins with losses, then we have to keep trading until we get positive or, until we reach a designated stopping time.

Many traders have a hard time knowing when to stop trading and that usually leads to problems. Each trader is different, and typically requires personalized rules to accommodate them so figuring out the proper quitting time requires some initial research.

Some traders only trade for 30 minutes and 3 trades maximum for example, while others will just power through the entire session or until they hit their winning goals.

Still others, and this is something I would suggest one focuses on, will research by back testing, all the trades that their strategy produces throughout several months of trading, and then isolate the most productive and least productive windows of time.

An interesting trade plan can then be applied that treats each session as 2 to 4 mini sessions, each with its own start and stop time, only focusing on what has been historically shown to be the most productive time slots to trade crude with their specific trade method.

I personally like using the PTU Trend Jumper strategy which has a very specific approach to this market. It’s the perfect strategy to set up mini sessions because it produces excellent setups.

When you combine these setups with smart trade plan rules, you can consistently produce profitable results.

Vital Key To Any Trade Strategy

There are other effective strategies too, but regardless of the strategy, I have found the most consistent success by trading it the same way each and every session, with a purely mechanical approach.

In other words, there is very little room for discretionary trading.

I’m not saying one couldn’t be successful trading crude oil futures by ‘touch and feel.’ I just haven’t known anyone that has succeeded at it.

This market offers up the same type of price action and price patterns over and over again so, armed with that information, I prefer to use a rule based mechanical strategy that takes advantage of that and in so doing, puts the odds in my favor on each and every setup.

Winning at futures trading is all about odds.

There is no such thing as perfection.

The good news is, we don’t need perfection to succeed.

We just need to put the house odds on our side. The strategies we use give us ‘better than house odds,’ in fact.

I don’t need to win every trade to make a lot of money trading crude oil futures.

Winning every trade isn’t possible anyway.

So I focus on quitting positive on most sessions and staying consistent with my approach. As long as your strategy offers up a positive average profit per trade, net of all winners and losers, you can be successful trading crude oil.

Of course, you also need to couple that up with very smart and conservative risk exposure and money management. In other words, you have to be adequately capitalized to trade crude oil futures.

You never want to risk more than 2% over your trade capital on any given trade and you should apply the philosophical concept that less is more.

Focus on quality of the trading opportunity and not quantity.

Give you plan a chance to produce for you. By letting the odds do all the heavy lifting for you, your account will ultimately ‘ramp up,’ and as it does, you can increase your position size while still sticking to the quality vs quantity concept.

Those that over trade, that is, trade for quantity, tend to have lower net profit results per trade or worse, can’t find a way to quit positive on most sessions. They give their profits back to the market as they keep pushing the buttons and entering order after order.

Just like the gambler who overstays his welcome at the blackjack tables.

You don’t want to be a gambler. You want to be a smart business man/woman who has pre-calculated the risks and knows when to walk away each session.

What Variables Go Into Successful Crude Oil Trading

There are the elements that are required to succeed at crude oil futures trading

  • Method
  • Trade plan and rules
  • Quality vs. quantity
  • Smart risk and money management
  • Discipline to execute the plan, each and every session
  • Research and knowledge of what to expect from the trade plan – this is critical to success!
  • Adequate capitalization

Don’t forget about the news releases.

Another important aspect to crude oil trading is the weekly Inventory Report that comes out every Wednesday or Thursdays on holiday shortened trade weeks. On Wednesday, it is released at 10:30 am.

If it is a holiday week, then expect its release on Thursday at 11:00.

Make sure to not try to execute new trades around this report.

We typically stop taking trades 5 minutes before the release. More conservative traders will even go flat and close out positions that happen to still be open prior to the report.

The problem with trying to execute trades through this report is that it will produce wild volatility and liquidity momentarily dries up at many price points. In other words, the price will hit your targets but you won’t get filled until some other unpredictable price level is reached.

In short, you lose control of your trade! That is never good!

While trading through the report is not the wisest thing to do, I like treating the after report trading as an entirely different trade session; almost like a 6 th session each week, with its own start times and quitting goals. I like to begin looking for trades a fast 2 minutes after the release. I will typically trade for one good winner and then I’ll quit for the session. Some traders like to wait 5 minutes.

Crude Oil Trading Can Be Lucrative

Crude oil futures is one of the most dynamic and lucrative day trading markets there is. It is critical though that you do a lot of preliminary research before risking real money.

It is wise to back test your intended approach in a pre-programmed spreadsheet so that you can see what your chosen trade plan has produced in the past. Then continue testing it forward in real time, while practicing it in a simulation account.

You want to establish a positive expectancy (average net profit per trade) as well as a plan that wins on most sessions and has a strong weekly win rate as well. I use a spreadsheet called the UTA (Ultimate Trade Analyzer) to track all my live trades and to back test each and every market, method and trade plan prior to risking real money.

Any trader can learn how to trade crude oil futures. Just make sure you respect the risk and realize that you have to treat this as a very serious and professional endeavor.

Treat it like a business and approach it with the same due diligence that you would apply to any business opportunity. With opportunity comes risk so you have to manage the risk exposure with intention and eyes wide open.

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