How you can trade crude oil futures

Oil futures are the most traded commodity in the world thanks to their high volatility and global influence. 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.

It is important to note the price of oil is quoted per barrel even though contracts are sold in units of 1,000 barrels. This contract size provides traders an opportunity to greatly magnify gains and losses.

Oil futures are known for their volatility. Crude oil is one of the most in-demand and vital commodities in the world because of its use both as a fuel source and an unrefined base for other products. The demand for crude oil coupled with the commodity’s position as a representative of the world economy at large means futures traders follow the supply and demand of oil closely to anticipate market movement.

This volatility and size in which the contracts are sold has caused oil futures to grow from a niche contract traded among large companies to a popular speculation for retail traders, specifically swing and day traders.

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Who buys oil futures?

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. Oil companies still purchase futures from each other to obtain competitors’ assets at lower prices and limit their exposure to risks. Their insider position within the oil market gives them an advantage over other traders when it comes to future price speculation. Other companies that heavily rely on crude oil such as transportation companies and refineries also purchase oil futures to hedge risks and stabilize costs in the volatile market.

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.

Where can I trade oil futures?

Oil futures are traded on both the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) depending on the benchmark you are looking to trade. North America’s benchmark, West Texas Intermediary (WTI), is traded on the NYMEX under the ticker ‘CL’. Brent Crude serves as the benchmark across Africa, Europe, and the Middle East and is traded on the ICE under the ticker ‘BZ’.

WTI is primarily sourced from the Permian Basin in Southwest Texas, and Brent Crude is drilled from the North Sea between the UK and Norway. Compared to WTI, Brent Crude is normally priced higher because of its superior quality.

Online brokerages offer access to WTI on the New York Mercantile Exchange (NYMEX) and Brent Crude on the Intercontinental Exchange (ICE). Mini futures with contracts half the normal size can be traded on the CME Globex platform.

How crude oil futures affects forex

Oil futures greatly affect forex as a prime export of several countries and a major import in nearly every other country. The value of a country’s currency can rise or lower significantly in reaction to the global availability of oil.

When oil prices rise, countries with an excess reserve of oil or significant production of the commodity such as the U.S. or Canada will see their currency rise in value against those of countries without significant oil reserves. Currencies with strong ties to oil exports are sometimes referred to as petrocurrencies. When the price of oil rises, these currencies tend to also rise in value, most affecting currency pairs that include only a single petrocurrency.

As the most traded commodity in the world, experienced forex traders often watch oil prices and speculate on their futures to strengthen their fundamental analysis. Read our in-depth guide to how currency pairs correlate with other assets here.