Buying and selling crude oil: a step-by-step guide
Is it possible to trade Brent crude oil?
A contract for difference (CFD) is an agreement between a trader and a broker to profit from the price difference between starting and closing a trade.
Traders can speculate on the price of oil futures contracts with most CFD trading platforms, but the contract sizes are typically significantly less than conventional futures contracts. For example, instead of a 1,000-barrel futures contract, a Brent Crude oil CFD order can be for 25 barrels.
To trade oil futures, how much money do you need?
The amount of money you’ll need in your account to day trade a crude oil futures contract varies depending on your futures broker, but you’ll need at least $1,000. Keep in mind that you’ll need enough funds in your account to cover any possible losses. If you decide you don’t want to risk more than 1 percent of your capital on any single trade, then you could only risk $10 per trade.
Where can I buy and sell Brent crude oil?
Brent Oil was first traded through open outcries on the London International Petroleum Exchange. Oil trading activities were digitalized and migrated to the Intercontinental Exchange’s electronic trading environment in 2005. (ICE). Brent futures are traded in the United States on the Intercontinental Exchange (ICE: B) and the New York Mercantile Exchange (NYMEX: BZ), with delivery dates for each month of the year. Brent Oil’s barrel price was trading below $40 until the turn of the century, when it began to test if it could break above. When oil demand in growing nations such as China and India increased, the Brent Oil price per barrel rose steadily over the next four years, reaching an all-time high of $146.29/barrel in July 2008. Brent Oil prices, like the rest of the markets, were thrown into a tailspin during the crisis of 2007-2008. The previous year’s +$100 gain per barrel was lost over the next six months, and Brent Oil ended the year at $40.15 per barrel.
In the next two years, the European oil standard regained more than $80, settling between $100 and $120. Oil price wars began in 2014 when the Organization of Petroleum Exporting Countries (OPEC), the world’s largest cartel with 14 members, refused to curb production, and Brent Oil fell below $40 in 2016. It had risen beyond $80/barrel, but the outbreak of the Coronavirus in 2020 led Brent prices to plummet along with the rest of the oil market.
What is the best way to invest in Brent crude oil?
You can invest in oil commodities in a variety of ways. Oil can also be purchased by the barrel.
Crude oil is traded as light sweet crude oil futures contracts on the New York Mercantile Exchange and other commodities markets across the world. Futures contracts are agreements to provide a specific quantity of a commodity at a specific price and on a specific date in the future.
Oil options are a different way to purchase oil. The buyer or seller of options contracts has the option to swap oil at a later period. You’ll need to trade futures or options on oil on a commodities market if you want to acquire them directly.
The most common way for the average investor to invest in oil is to purchase oil ETF shares.
Finally, indirectly investing in oil through the ownership of several oil firms is an option.
Are oil futures delivered physically?
The underlying asset of an option or derivatives contract is physically delivered on a fixed delivery date with a physical delivery. Let’s take a look at a physical delivery scenario. Assume two parties agree to a one-year Crude Oil futures contract at a price of $58.40 in March 2019. The buyer is committed to acquire 1,000 barrels of crude oil (unit for 1 crude oil futures contract) from the seller regardless of the commodity’s spot price on the settlement date. The long contract holder loses if the spot price on the specified settlement day in March is less than $58.40, while the short contract holder benefits. If the spot price is higher than the $58.40 futures price, the long position profits, while the selling loses.
What is the purpose of futures contracts?
A futures contract is a legally enforceable agreement to acquire or sell a standardized asset at a defined price at a future date. Futures contracts are exchanged electronically on exchanges like the CME Group, which is the world’s largest futures exchange.
What is the best way to trade energy futures?
Energy futures trading can be done on a regulated market or over-the-counter (OTC).
The Chicago Mercantile Exchange (CME) and, more specifically, the New York Mercantile Exchange are the most prominent markets for energy futures (NYMEX). NYMEX is a subsidiary of the CME Group, which specializes in the trading of energy commodities. Tokyo TOCOM and the Intercontinental Exchange are two more famous trading venues (ICE).
Traders enter their orders into a central clearinghouse that matches buyers and sellers while trading on certain markets. The system is completely self-contained. It can process large amounts of transactions quickly and with no lag.
Aside from authorized exchanges, energy futures can also be traded over-the-counter (OTC). To do so, the trader enlists the assistance of a counterparty. Qualified financial intermediaries, such as an investing firm or a brokerage firm, are frequently involved.
Energy futures can be bought and sold by retail traders on nearly every broker’s platform. Energy futures are a widely-used instrument backed by all financial service providers due to their high liquidity.
What is the duration of an oil futures contract?
You’re not going to the store and buying a couple thousand 55-gallon barrels of crude oil to store in your backyard, are you? That’s just not feasible.
Crude oil futures contracts were created to allow oil corporations and companies that consume a lot of oil to plan delivery of the commodity at a set price and date. Today, these contracts are also traded between speculators who expect to profit from the commodity’s volatility.
On the futures market, these derivatives are a hot commodity, with the potential to yield large gains in a short period of time. Unfortunately, when bad decisions are made, the consequences can be just as severe.
The majority of oil futures contracts include the purchase and sale of 1,000 barrels of crude oil. When a contract is purchased, it stipulates that these barrels of oil will be delivered at a certain date (up to nine years away) and for a predetermined price at a predetermined date (or expiration date).
Let’s imagine you bought an oil futures contract today with a three-month expiration date; you’d be owed 1,000 barrels of oil three months from now, but you’d pay today’s price let’s say $50 per barrel as an example.
You notice that the price of oil has climbed to $51 per barrel in 30 days, indicating that your futures contract is now worth $1,000 more than you paid. If the price of oil fell to $49 per barrel, on the other hand, you would have lost $1,000.
In either case, you’ll want to sell as soon as possible when the contract expires. Individual investors and price speculators who aren’t large-scale crude oil users typically close off futures contracts well before they expire.
- You’re probably not going to be able to store 1,000 barrels of oil. You probably don’t have enough room to store 55,000 gallons of oil. If you own the contract when it expires, you’ll have to decide where to store the oil and what to do with it. Your entire investment is gone if you opt not to take ownership.
- Futures contracts lose value as they get closer to expiration. The futures market operates at a breakneck speed, with the thrill being in forecasting what will happen in a week rather than when the contract will expire. The premium paid for future value growth decreases as the contract approaches its expiration date. As a result, holding these contracts for too long will limit your prospective gains.
Pro tip: If you want to invest in oil futures, you should open an account with a broker who specializes in future contracts. When you open an account with TradeStation, you can get a $5,000 registration bonus.
Is TD Ameritrade a good place to trade oil futures?
Micro futures, such as Micro WTI Crude Oil futures, Micro Bitcoin futures, E-mini Index futures, and others, can help you diversify your portfolio.