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What are the Best Tips for Oil Futures Trading?

By Patrick Lynch
Updated May 16, 2024
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Oil futures trading involves guessing whether the price of crude oil will rise or fall. Each contract is worth 1,000 barrels which means $1 U.S. dollar (USD) change in the value of oil affects the trade by $1,000 USD. Online brokerages only allow those with a high net worth to trade, and prospective traders should read the wealth of information about the market first. Traders go "long" or "short" depending on their perceptions of the fluctuation of oil prices. It is possible to lose a fortune so traders are urged to only risk what they can afford.

Every crude oil futures contract is worth 1,000 barrels of oil. The New York Mercantile Exchange (NYMEX) trades crude oil from Monday to Friday during normal business hours. Controlling 1,000 barrels means that each crude oil futures contract increases or decreases by $1,000 USD every time the value of crude oil changes by $1 USD.

To invest, find a broker and open an account. It may be possible to open an account online. Take the time to carefully read through the risk disclosure information to get a good idea of what is at stake. The applicant will also be asked his or her income, investment experience, and net worth. This is all necessary to decide if the applicant is eligible for oil futures trading.

It would be unwise to enter into oil futures trading without examining the requisite literature. Read and analyze charts which explain important factors such as the available supply of oil and potential demand. The American Petroleum Institute, for example, produces a weekly supply/demand report that can be read by traders worldwide. Another important factor is the crack spread, i.e., the relationship between crude oil and related products such as unleaded gas.

Technical analysis such as viewing decreases and increases in trading volume should also be undertaken. Once enough research has been completed, the trader must then deposit money and purchase the number of oil futures contracts this sum can buy. Remember, the margin requirements change depending on various market factors. Traders need to ask their broker for the precise margin necessary.

Traders who believe the price of oil will go up are said to go long. Those who think the value of oil will fall go short. If a trader goes long and the price of oil goes up $10 USD, the trader gains a profit of $10,000 USD. Likewise, if the trader goes long and the price falls by $7, he or she loses $7,000 USD.

Traders can close the trade by selling the contract if they went long or buying the contract if they went short. The use of margins makes oil futures trading risky but potentially lucrative. Margins allow traders to control many times more than what they invested. This means a $1,000 USD investment could result in control of $10,000 USD worth of oil.

Should the trader guess right, profit could be ten times or more the amount invested. Yet it is possible to lose more than is invested. A trader who risks $3,000 USD and finds the market moved against him to the tune of $5,000 USD has to find another $2,000 to pay off the debt. Oil futures trading is generally only for those with a high net worth and can afford heavy losses.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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