What Causes Movement In Oil Futures
Any time you decide youre going to start trading a new asset, its important to get an understanding of what causes movement in the value of that asset. Oil is no different.
Some brush off oils price movements as a simple balance between supply and demand. When supplies are up and demand is down, prices must fall, and vice versa, but in reality, the factors that determine the price of crude oil are much more complex than that. Here are the most significant:
Determining Profit Or Loss:
The WTI Crude Oil futures contract trades in $0.01 price increments. As each contract is equal to 1,000 barrels of oil, a $0.01 price move equates to $10.00 . If Crude Oil prices were to move up or down $1.00 per barrel, that would equate to $1,000.00 +/-.
For this example, lets assume you went long one August 2020 Crude Oil futures contract at a price of 33.10. If Aug20 Crude Oil futures prices were to rise to 33.50, that would be a 0.40 gain or $400 . Conversely, if Aug20 Crude Oil prices dropped to 33.05, that would be a 0.45 loss or $450 .
Please note, when calculating profits or losses, you must also take into account commissions and associated trade fees to determine your net profit or loss.
Example: Long Crude Oil Futures Trade
You decide to go long one near-month NYMEX Brent Crude Oil Futures contract at the price of USD 44.20 per barrel. Since each NYMEX Brent Crude Oil Futures contract represents 1000 barrels of crude oil, the value of the futures contract is USD 44,200. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 12,825 to open the long futures position.
Assuming that a week later, the price of crude oil rises and correspondingly, the price of crude oil futures jumps to USD 48.62 per barrel. Each contract is now worth USD 48,620. So by selling your futures contract now, you can exit your long position in crude oil futures with a profit of USD 4,420.
|BUY 1000 barrels of crude oil at USD 44.20/barrel||USD 44,200|
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How Much Money Do I Need To Invest In Oil
Investing in oil isnt just for the rich, and it can be fairly affordable. Several well-known oil stocks frequently trade for under $100 a share. ETFs are another inexpensive way to invest in oil. ETFs trade on an exchange and investors can buy individual shares of an ETF, similar to stocks. The median market price of 43 energy ETFs available through Fidelity Investments was about $24 a share as of this writing a small price tag for exposure to a large collection of energy companies.
What Is Oil Trading
Oil trading is the buying and selling of different types of oil and oil-linked assets with the aim of making a profit. As oil is a finite resource, its price can see massive fluctuations due to supply and demand changes. This volatility makes it extremely popular among traders.
You can use CFDs to trade on oils spot price, or the prices of oil futures or options contracts, without having to own any actual oil.
There are three ways you can trade oil:
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Should I Invest In Oil
Now that Ive laid out the pros and cons, its fair to say that you should invest in oil or gas if you are comfortable with the risks involved.
Those who decide to invest should know that there is a great risk of losing money. There is also a chance you could make a lot of money. Educating yourself ahead of time is the best way to minimize your risk and increase your chances of profitability.
That being said, lets dive into the many different ways you can invest in oil and how to get started with each.
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.
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Open Your First Oil Trade
Now that you know how youll trade and what you want to focus on, its time to open your first position.
Youll need to choose whether to buy or sell the market depending on whether you think oil will rise or fall in price and decide on your position size, which will determine the margin you pay.
This is also be a good time to think about how youll mitigate risk. We offer a range of solutions for risk management, including stop-losses and limit-close orders these are used to close trades at predetermined levels of loss and profit respectively.
Crude Oil Options Explained
Crude Oil options are option contracts in which the underlying asset is a crude oil futures contract.
The holder of a crude oil option possesses the right to assume a long position or a short position in the underlying crude oil futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Tips On Oil Futures Trading
There are several tips that can guide you in trading oil futures. Some of these tips include:
- In the process of trading and monitoring prices, keep in mind that the value of unleaded gas can impact that of oil.
- It is important to pay close attention to economic indicators since this can help to determine future price movements.
- The demand for crude oil futures is higher in summer and even winter. However, the reasons differ. In the summer, the demand is higher due to more driving and a higher need for crude oil. Hence, it helps to spike its value.
- In winter, there is more need for heating oil and this leads to a rise in price. Accordingly, keep track of the Northeasts weather. This is because it contributes significantly to the consumption of heating oil compared to other regions.
- Keep track of the reduction or increase in oil prices by OPEC since it will impact on the demand and supply of crude oil globally.
- You need to be aware of the market players in the futures market. There are hedgers, traders, and either of these is the major participants in the market. Asides from this group, theres also the small traders and investors. This group has may impact less on the energy futures market, even though not in all markets.
Crude Oil Futures And Options
Crude Oil Futures and Options are Derivatives Contracts that give investors exposure to the international price of crude oil. The underlying Commodity is listed and traded on the New York Mercantile Exchange , a subsidiary of the CME Group. This product serves as a key international pricing benchmark and can be used as an effective hedging tool to manage local users diesel price risk. Contracts are settled in rands and can easily be accessed through JSE Commodity Derivatives Members.
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Create Your Oil Trading Account
Whether you want to spread bet, trade CFDs or invest, you could be ready to take your first position in minutes.
Simply fill out our online form to open an account theres no obligation to add funds until you want to place a trade.
Alternatively, you can practise trading first in our risk-free demo account.
Oil Futures Explained: Your Ultimate Guide To Wti And Brent Crude Futures Trading
The historic negative turn in WTI crude oil prices in 2020 has attracted the attention of investors looking to profit from trading on the volatility in the market.
If you are considering investing in the oil market for the first time you might have some questions about how it works: What are crude oil futures? Why do investors start trading oil futures? How are oil prices explained? What are the pros and cons of investing in oil futures? How can you trade oil futures contracts?
Here we define WTI and Brent oil futures trading and cover the basics of the markets to get you started. Moreover, we have also included our Oil Futures Explained video, in which David Jones, chief market strategist at Capital.com, explains the different types of oil contracts and summarises what drives the market.
A Beginner’s Guide To Crude Oil Options
We’re often asked to explain what determines the price of crude oil options. This post will be the first in a series on how the pricing of crude oil options.
If you are unfamiliar with crude oil options, you can think of them as a form of insurance against rising or falling crude oil prices. In return for the right to buy or sell crude oil without the obligation, options buyers pay an upfront premium, very similar to how you pay a premium for an insurance policy.
The four major variables that determine the price of crude oil options are:
- Prevailing price of the underlying future or swap relative to the strike price of the option
- Time value
- Interest rates
The variable which has the most influence on the price of an option is the relationship between the price of the underlying crude oil futures or swap and the strike price of the option. Depending upon the price of the underlying swap relative to a given strike price, an option is said to be at-the-money, in-the-money, or out-of-the-money.
To put the terminology into numerical context, if the June 2013 WTI crude oil futures contract were currently trading at $95/BBL, a June 2013 WTI crude oil call option with a strike price of $90/BBL would be considered in-the-money. On the other hand, if the June 2013 WTI crude oil futures contract were currently trading at $95/BBL, a June 2013 WTI crude oil call option with a strike price of $100/BBL would be considered out-of-the-money.
What Determines Crude Oil Prices
Crude oil prices are driven by demand as well as supply from producers in key oil-producing regions including North America, the Middle East, and Russia.
Geopolitical developments have a strong impact on prices, as seen in 2020 with a price war between Saudi Arabia and Russia driving prices down. The amount of oil storage capacity available can also determine the commoditys value: full storage points to oversupply, while low levels of oil in storage indicate tight supply.
The combination of the price war, demand destruction during the Covid-19 pandemic and limited storage availability prompted the negative turn in prices in spring 2020. Extreme weather events can also affect the oil market if production is disrupted, as when Hurricane Katrina hit US output in 2005, driving prices to record highs.
Over the longer term, the International Energy Agency expects oil demand to peak in the late 2020s as international environmental policies favour carbon emissions reduction through energy efficiency and the electrification of transport.
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The Basics Of Oil Etfs
Oil commodity ETFs provide a simple way to expose your investment strategy to the price and performance of oil, without actually owning any oil itself. Oil ETFs consist of either oil company stocks or futures and derivative contracts that track the price of oil or, in some cases, oil-related indexes.
For example, one of the most popular oil ETFs is USO, the United States Oil Fund. In the case of this particular oil ETF, you do not actually own the oil. Instead, the fund consists of futures, options, and forward contracts for different oils, gases, and petroleum-based fuels. So you have exposure to the price of oil without buying up any barrels of the actual stuffbut that’s not to say the investment will be any safer or less volatile than investing directly.
For example, USO closed at $2.81 per share at the end of trading on Tuesday, April 21, 2020, down over 90% since its inception in April 2006. It also announced that same day that it would now invest approximately 40% of its portfolio in crude oil futures contracts for June, about 55% of its portfolio in crude oil futures contracts for July, and about 5% of its portfolio in crude oil futures contracts for August. The change came on the heels of volatile market conditions in the crude oil markets.
Find Your Oil Trading Opportunity
You can trade a variety of oil markets with including popular crude oils WTI and Brent Crude, as well as no lead gasoline and heating oil.
The best way to identify an opportunity is to keep an eye on breaking news and key price levels, using our range of tools and resources:
Get technical and fundamental analysis straight from our in-house team
Keep your finger on the pulse with unique price and economic data alerts
Get actionable buy and sell suggestions based on analysis
Discover price trends using popular indicators such as MACD and Bollinger bands
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Heavy Consumers Of Oil
Airlines, transportation companies, refineries, and a long list of other companies are highly dependent on oil, realizing decreased profits when oil prices are high and reduced costs when prices are low.
As a result, these companies often purchase oil futures in an attempt to stabilize costs when the price of the commodity is headed up.
Relationship Between Arbitrage Arguments And Expectation
The expectation-based relationship will also hold in a no-arbitrage setting when we take expectations with respect to the risk-neutral probability. In other words: a futures price is a with respect to the risk-neutral probability. With this pricing rule, a speculator is expected to break even when the futures market fairly prices the deliverable commodity.
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How To Invest In Oil Wells With Dpp
Want to invest more directly? Then consider using direct participation . These are made for direct investments into the production or exploration of oil and gas.
DPPs come with two major benefits:
- Cash flow.
- Tax advantages.
They also require a lot of due diligence and come with some level of risk based on the investment.
With a DPP, youre buying a percentage of the assets and interest of an operating oil company. This is called working interest. Essentially, you gain all the advantages of owning a portion of the business without actually setting up or getting involved with the operations.
When a DPP investment is profitable, it can become a great form of passive income with a steady flow of cash it provides.
Before you get involved with DPPs, understand that there are a few different kinds. These include:
- Exploratory Drilling Program: highest risk, involves looking for new oil in new areas.
- Developmental Drilling Program: most common, involves looking for new oil in proven areas.
- Working Interest Program: involves wells that are currently producing.
- Rework Program: least common, involves improving low-producing wells.
What Drives Crude Oil Prices: Financial Markets
Oil market trading activity involves a range of participants with varying motivations, even within individualparticipants. Some, such as oil producers and airlines, have a significant commercial exposure to changes in theprice of oil and petroleum-based fuels, and may seek to hedge their risk by buying and selling energyderivatives. For example, an airline may want to buy futures or options in order to avoid the possibility thatits future fuel costs will rise above a certain level, while an oil producer may want to sell futures in orderto lock in a price for its future output.
The Commodity Futures Trading Commission publishes a weekly activity report on oil trading that occurs onexchanges , the Commitment of Traders Report. In this report, the activities of multiple tradingcategories are detailed, including physical participants ,money managers , and swap dealers . On a net basis , physicalparticipants tend to be net short while traders in the money managers category tend to be net long.
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Direct Investments In Oil
Buying oil futures or options is a direct investment in oil. Futures contracts are an agreement to purchase a certain quantity of an asset at a particular price and time in the future. Options contracts allow the buyer or seller to exchange oil at a specified date in the future. Either of these investments can be carried out on a commodities exchange.
What Is The Oil Spot Price
Oil spot prices represent the cost of buying or selling oil immediately, or on the spot instead of at a set date in the future. While futures prices reflect how much the markets believe oil will be worth when the future expires, spot prices show how much it is worth right now.
For our undated spot markets, we use the two nearest futures to calculate the price.
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Oil Market Investment Options
Regardless of the underlying reasons for changes in oil prices, investors who want to invest in oil markets and capitalize on energy price fluctuations have a number of options.The bulk of oil trading takes place in derivatives markets, utilizing futures and options contracts. These may be out of reach of many individual investors, but there are several other routes to add oil to your portfolio. One simple way for the average person to invest in oil is through stocks of oil drilling and service companies. In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs. Several sector mutual funds that invest mainly in energy-related stocks are available like the iShares Global Energy Sector Index Fund , and to energy-sector mutual funds, like the the T. Rowe Price New Era Fund . These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk.
Investors can gain more direct exposure to the price of oil through an exchange-traded fund or exchange-traded note , which typically invests in oil futures contracts rather than energy stocks. Because oil prices are largely uncorrelated to stock market returns or the direction of the U.S. dollar, these products follow the price of oil more closely than energy stocks and can serve as a hedge and a portfolio diversifier.