The Ins and Outs of Trading Crude Oil Futures

By providing liquidity and price discovery, crude oil futures play a crucial role in the global energy market, helping to balance supply and demand. Understanding the aspects of oil trade is not only important for trading futures, but understanding the global economy as a whole.

What Are Crude Oil Futures?

These contracts are primarily used by producers and consumers to hedge against price volatility. They also serve as a tool for investors and speculators to potentially profit from fluctuations in oil prices without the need to physically handle the commodity.

» Need more examples? Here are some high-yield oil dividend stocks and oil penny stocks

Potential Advantages and Risks of Trading Crude Oil Futures

Current Trends in Crude Oil Futures Prices vs. Historical Data

Source: Tradingview



Crude oil futures are volatile, trading between $70 and $80 per barrel. Geopolitical tensions and supply chain issues are driving this.

Prices have recovered from 2020 lows but remain below the early 2010s peak of over $100. In June 2023, prices were around $75, up 30% from pandemic lows but still below the 2014 high of $110.

» Learn more: Our guide to AI algorithmic trading

Key Factors Influencing Crude Oil Futures Prices

• Geopolitical events: Conflicts in oil-producing regions could disrupt supply, causing price spikes. For instance, tensions in the Middle East often lead to market volatility due to fears of supply disruptions.
• Economic indicators: GDP growth, unemployment, and industrial production impact crude oil demand. Strong growth raises demand and prices, while downturns reduce them. During the 2008 financial crisis, reduced activity led to a sharp price decline.
• OPEC decisions: OPEC's production quotas affect prices. Cuts reduce supply, increasing prices, while production boosts could lower them. Traders closely watch OPEC meetings with an economic calendar.
• Supply and demand dynamics: Production rates, inventory levels, and consumption directly influence prices. Oversupply, like during COVID-19, caused prices to drop as demand plummeted.
• Shipping and transportation costs: Costs associated with transporting crude oil, including shipping rates, pipeline tariffs, and insurance, could significantly influence futures prices.

Overview and Characteristics of West Texas Intermediate (WTI) and Brent Crude

Crude oil types vary by origin, chemical makeup, and physical properties. The two most significant and widely traded types are West Texas Intermediate (WTI) and Brent Crude.

» Wondering what determines the performance of Brent Crude Oil?

Key Aspects of Crude Oil Futures

A standard WTI crude oil futures contract on NYMEX represents 1,000 barrels, priced in USD per barrel. It typically requires a margin deposit.

Contracts have specific delivery dates, typically monthly, with delivery in Cushing, Oklahoma. Traders must roll over or close positions before expiration to avoid physical delivery. The tick size is $0.01 per barrel ($10 per contract).

Key participants in the crude oil futures market include:

• Hedgers: Producers, refiners, and airlines use futures to manage price risk, locking in prices to stabilize costs/revenues.
• Speculators: Traders and financial institutions seek potential profits from short-term price movements, adding liquidity but taking on significant risk.

» Find out how to trade crude oil CFDs in volatile markets

Crude Oil Futures Regulation

CFTC oversees crude oil futures trading, ensuring market integrity. Exchanges like NYMEX have their regulatory frameworks.

Regulations include preventing market manipulation, adhering to position limits, reporting large positions, and complying with AML and KYC rules etc.

» Beginner? No problem, here are some essential tips on trading crude oil CFDs

Effective Technical Analysis Tools for Crude Oil Futures

• Moving averages: SMA and EMA smooth out price data, highlighting trends and reversal points. Crossover strategies indicate buy/sell signals.
• RSI: Momentum oscillator identifying overbought (above 70) or oversold (below 30) conditions, useful for timing entries/exits.
• Bollinger bands: Three bands (moving average + standard deviations) identify overbought/oversold conditions and potential breakouts.
• MACD: Trend-following indicator showing the relationship between two moving averages. Crossovers and divergences signal trades.
• Fibonacci retracement: Horizontal lines indicating potential support/resistance levels based on Fibonacci ratios, useful for predicting reversals.

» Learn more with our trading central analysis

Common Crude Oil Futures Trading Strategies

• Trend following: Trade in the trend’s direction, using indicators like moving averages and MACD. Enter and hold until reversal signs appear.
• Range trading: Identify and trade within price ranges. For example, traders might open positions at support and close positions at resistance while using Bollinger Bands and RSI for entries/exits.
• Breakout trading: Enter when the price breaks support/resistance, indicating a new trend. Use volume, moving averages, and price patterns to confirm, and consider stop-loss orders to manage risk.

» Do you know why oil is traded in USD only?

Risk Management Techniques for Crude Oil Futures

1. Stop-loss orders: Automatically close positions when a price hits a predetermined level, limiting potential losses.
2. Position sizing: Allocate capital based on risk tolerance. Limit each position size to a small percentage of total capital to preserve it.
3. Diversification: Spread investments across different instruments/markets to reduce risk and volatility.

» Here are 5 basic differences between trading CFDs and futures

Trading Crude Oil Futures

Just like with other instruments, it mostly comes down to understanding market dynamics, strategies, and various tools at your disposal. Avoid the common pitfalls and follow best practices. Remember to stay updated on the news and to always aim to improve your trading skills.

» Ready to get started? See our list of CFDs on oil and other energy products