How To Buy Oil Futures
Crude oil trades on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodities exchanges around the world. Futures contracts are agreements to deliver a quantity of a commodity at a fixed price and date in the future.
how to buy oil futures
Oil options are another way to buy oil. Options contracts give the buyer or seller the option to trade oil on a future date. If you choose to buy futures or options directly in oil, you will need to trade them on a commodities exchange.
Crude oil futures on the New York Mercantile Exchange (NYMEX) are the world's most actively traded futures contract on a physical commodity. Because of its excellent liquidity and price transparency, the contract is used as a principal international pricing benchmark. The NYMEX also offers trading in heating oil futures and gasoline futures.
Crude oil futures provide individual investors with an easy and convenient way to participate in one of the world's most important commodity markets. In addition, a broad cross-section of companies in the energy industry-from those involved in exploration and production to refiners-can use crude oil futures contracts to hedge their price risk. Light, sweet crude is preferred by refiners because of its low sulfur content and relatively high yields of gasoline, diesel fuel, heating oil, and jet fuel. Even companies that are substantial consumers of energy products can use crude oil futures to protect against adverse price fluctuations.
Crude oil futures are 1,000 barrels per contract, traded from 6:00 p.m. U.S. until 5:00 p.m. U.S. ET, all months of the year. However, you can trade more than just NYMEX crude oil futures online with Schwab. We also offer Brent crude oil futures as well as E-mini crude oil futures, which are just 50% of the size of a standard futures contract. E-mini crude futures trade exclusively on the Chicago Mercantile Exchange's Globex platform nearly 24 hours per day.
It is important to understand the benefits and risks involved with crude oil futures before placing a futures trade. Compared to traditional investments, with crude oil futures you can trade nearly 24 hours a day during the trading week and take advantage of trading opportunities regardless of market direction. Crude oil futures also provide the ability to trade with greater leverage and allow a more efficient use of trading capital. However, trading leveraged products like crude oil futures also involves the risk that losses can exceed the amount originally invested and may not be suitable for all investors.
Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. Futures accounts are not protected by SIPC. Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.
But for retail investors, investing in oil is not as straightforward as it may first appear. After all, how many people have a fleet of cargo ships or a warehouse ready to store a few thousand gallons of crude? This is why oil futures can offer one of the best investment solutions.
Although oil investors can also opt for oil-focused stocks or oil ETFs, the value of these investment products is only indirectly linked to the price of oil. While an indirect investment in oil does have its benefits, oil futures contracts trade much more closely to the true underlying oil price and, therefore, are more suitable for those looking to take advantage of oil price swings.
Historically, oil futures were used by oil producers or oil consumers as a method of locking in the price of physical crude. Oil producers could guarantee sales of expected future production, and oil consumers could guarantee adequate supply was managed. At the end of an oil futures contract, those with long contracts would buy and take delivery of oil. Meanwhile, those with short contracts would sell and deliver oil.
The important point to make here is that physical delivery is still honored with some types of oil futures contracts. Therefore, it is pivotal to check which type of contract you are trading. Even if physical delivery is expected at the end of a futures contract, a retail investor can still use the contract to trade oil prices. As long as all futures contracts are closed before the date of expiry, profit and loss are usually settled in cash.
Alongside following the price of oil more closely, another key advantage of trading oil futures contracts is that the total value of futures contracts is not usually required to open a position. Brokers that offer oil futures trading typically use a mechanism called margin.
There are several reasons why oil futures contracts could be used to gain exposure to the oil markets. We have touched on a few of these already but there are a few additional advantages that are also worth mentioning.
To profitably buy and sell oil futures all investors need to have a good understanding of oil fundamentals, appreciate the specifications of each oil futures contract, choose a respectable brokerage firm, and open a trading account. While getting to the stage where you are ready to place your first trade can seem like a daunting task, the process is much more manageable when broken down into bite-sized pieces.
Investing in oil futures contracts is not a set-it-and-leave-it strategy. Oil futures contracts can last from a couple of days up to 6 months, which means that these products are used to capitalize on shorter-term price movements. This means that understanding the fundamentals of oil is crucial.
Crude oil is a natural resource extracted from the ground. It is used in the production of fuels, petrochemicals, and energy. Importantly, its price is predominantly driven by supply and demand, which can be unbalanced due to a variety of factors. Changes to the global economy, instability in oil-producing countries, and geopolitical scenarios are just a few examples. An oil futures trader needs to keep abreast of all oil market news so that a position can be managed accordingly. Check out our guide for a full breakdown of what elements determine the price of oil.
Alongside an understanding of supply and demand, an oil futures trader needs to be able to track the underlying price of crude oil. The most used benchmarks for the price of oil are the West Texas Intermediate (WTI), which is used for the U.S. market, and Brent, which originates from the United Kingdom and is used in Europe and Asia. Most oil futures contracts track one of these two global benchmarks.
In addition to the contract size, it is also important to check the expiry of each contract. Are you entering an oil futures trade for a couple of weeks or for a couple of months? If you expect prices to rise above $50, how long do you think it will take prices to get there? The contract length of an oil futures contract can be just as important as the entry price. Both CL and BRN contracts expire on a monthly timeframe.
Finally, as mentioned previously, some oil futures contracts are physically delivered. The NYMEX WTI Crude Oil Futures contracts fall into this category. This means that unless a futures contract is previously cash-settled, physical oil needs to be purchased or sold on the date of expiry. In comparison ICE Brent Crude Futures and the WTI equivalent, ICE WTI Crude Futures, are cash-settled, meaning that the risk of physical delivery is removed.
Once you think you have found a suitable brokerage, next it is time to open a demo account. Opening an account that lets you trade with virtual currency will allow you to gain an appreciation for the different futures contracts offered and become familiar with any margin requirements. A demo account will also help you to see exactly how the platform works. Many demo accounts can be opened with basic personal information and an email address.
Before rushing to open a brokerage account, it is important to assess the downsides involved with trading oil futures. For all the advantages on offer, there are also a few risks that are worth considering:
Oil futures are extremely useful for shorter-term traders that wish to capitalize on price swings in the oil markets. Oil futures markets track the underlying price of crude oil closely and are one of the most liquid markets in the world.
However, oil futures contracts should not be considered for those looking for a set-it-and-forget-it strategy. Like stock traders, the best oil futures traders have their fingers consistently on the pulse of market news, which is why trading oil futures is still considered an advanced form of investing. All oil futures traders should feel confident with contract specifications and how to use a specialized brokerage platform. However, with a key understanding of oil fundamentals and a strong trading strategy, oil futures can prove to be extremely lucrative.
An oil future is a bounded agreement to buy or sell an amount of crude oil at a future date. A typical oil futures contract represents 1,000 barrels of crude oil and has an expiration date ranging from one month to nine years.
This volatility and size in which the contracts are sold has caused oil futures to grow from a niche commodity traded among large companies to a popular speculation for retail traders, specifically swing and day traders who can capitalize on the volatility of crude oil.
Oil futures were traditionally bought by corporations that physically dealt with crude oil in their business dealings. However, large investment institutions such as hedge funds, mutual funds, and banks are now the biggest players in the oil futures market. Their breadth of monetary and analytical resources allows them to dedicate the time and attention needed to trade the expensive and risky futures contracts.
Increasingly more independent investors are also finding their way to the futures market. While it is generally advised traders only risk a small portion of their overall portfolio on these high-risk contracts, playing them right can result in massive returns. Although individual traders still make up a small portion of the crude oil futures trading and have little impact on the price changes in the market. 041b061a72