Crude oil is considered one of the most traded commodities in the world, and its price affects the prices of many other goods, including gasoline and natural gas. However, the impact of crude oil prices also influences stock, bond, and currency prices around the globe. Crude oil remains a major source of energy in the world, despite the growing interest in the renewable energy sector.
Crude Oil Basics
Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel, and many other petrochemical products. It comes in several different grades, and the fundamentals vary because it is a raw product. Light sweet crude oil is the most well-known grade of crude oil traded, as it is easier to refine into other products and is traded on the New York Mercantile Exchange (NYMEX). Brent crude oil is another grade that is primarily traded in London and has been seeing an increase in interest. Russia, Saudi Arabia, and the United States are the three largest oil producers in the world. Brent is the most commonly used benchmark for setting gasoline prices.
Specifications for Crude Oil Contracts
Trading crude oil can be confusing when you start. Try to memorize these specifications before you begin:
- Trading symbol: CL
- Exchange: NYMEX
- Trading hours: 6 PM to 5 PM Eastern Time
- Contract size: 1,000 U.S. barrels (42,000 gallons)
- Contract months: All months
- Quoted price: price per barrel (e.g., $65.50 per barrel)
- Tick size: $0.01 per barrel ($10 per contract)
- Last trading day: the third business day before the 25th day of the month preceding the delivery month
Traders must 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 specified price. If you own a call option, the only way to avoid actually taking physical delivery of 1,000 barrels of crude oil is to offset the trade before the due date. Futures trading is not advised for novice investors.
Tips for Trading Crude Oil Contracts
When tracking price movements and making trades, remember that gasoline and heating oil prices can affect crude oil prices. Demand is usually higher during the summer and winter months, but for different reasons. During the summer, increased driving raises demand for crude oil, leading to higher prices. In winter, the demand for heating oil increases, resulting in rising prices. Pay attention to the weather in the Northeast, where heating oil is used more than in any other area, and monitor OPEC’s decisions to cut or increase oil production, which dictate the global supply and demand for oil.
Volatile Market for Crude Oil Contracts
Major news events can happen overnight, causing unexpected and wide fluctuations in oil prices. The same can happen throughout the day, as crude oil futures are traded around the clock. Whether it’s an economic report or tensions in the Middle East, the tense supply situation can increase price movements. Supply and demand dictate how prices move, but the market also shifts based on emotions, especially with retail investors trading day-to-day. If tensions escalate in the Middle East, it can be unpredictable how potential supply disruptions may unfold, and traders often react quickly to news and adjust their strategies based on price volatility.
One of the recent events that led to a significant rise in crude oil prices was Russia’s invasion of Ukraine. In February 2022, crude oil began trading above $100 per barrel, the highest price since 2014.
Movement
Crude Oil Prices
The reason prices move rapidly is that traders with short positions in the market tend to cover their positions quickly if the price rises slightly, either eroding their gains or incurring losses. To do this, they must place buy orders to cover. This wave of buying occurs at the same time that speculators join in to establish or add to long positions. Short sellers will cover their positions quickly because the risk is too great. If a major development disrupts supply, short sellers can lose more money than they theoretically invested, leading to a margin call from their broker – one of the most frightening calls in the world of investing.
Most often, crude oil tends to be a trend-driven market, primarily influenced by psychological movement, and there is usually a significant bias either to the upside or the downside. Trading from the side the market is moving towards will help increase the chances of success. Crude oil also tends to get stuck in long ranges after a big move, and the person who can identify these ranges has many opportunities to buy at the bottom and sell at the top.
The value of the US dollar is a key element in the price of oil. A strong US dollar puts pressure on oil prices, while a weaker US 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 excessively rising prices can hinder the economy. This trend becomes a concern as oil prices approach the psychological price of $100 per barrel.
Day Trading Crude Oil Futures
Crude oil is considered a
Source: https://www.thebalancemoney.com/trading-crude-oil-futures-809351
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