Crude oil has been a major commodity in the world economy for more than a century and trading oil futures is one of the best ways to speculate on the price of crude oil if you can’t trade contracts for difference (CFDs).
If you want to speculate on the price of oil but prefer to hold stocks, you can either buy oil stocks or you can invest in oil ETFs, such as the U.S. Oil Fund (USO). When you buy crude oil stock, you can track the commodity without investing directly in its perceived value. This is especially interesting because every oil refiner or distributor has a wildly different marketshare and range of services.
Buying oil stocks or shares of an energy or oil ETF will give you indirect exposure to the oil market, while trading oil futures more closely tracks the underlying crude oil market.
Trading oil futures also requires skill and an efficient and receptive broker. Remember, how you trade futures is just as important as where you trade, so make sure you pick the right broker.
How to Buy Oil Futures:
- Step 1: Get Familiar with Oil Market Fundamentals
- Step 2: Develop a Plan of Action
- Step 3: Pick a Broker
- Step 4: Open an Account and Go Live
Overview: Buying Oil Futures
The often-volatile oil market is not for everyone, so be aware that many factors affect the price of oil and most successful oil traders have done exhaustive research on crude oil fundamentals to understand how they move the oil market.
The most important fundamental factors affecting the oil market involve production, reserves and world demand, although geopolitical concerns are also important since a large part of world oil production comes from the Middle East. Also, decisions made by the Organization for Petroleum Exporting Countries (OPEC) have a significant effect on production levels and, ultimately, on the price of oil.
The oil futures contract most commonly traded is the CME Group’s crude oil futures contract traded under the symbol CL. These contracts trade on the New York Mercantile Exchange and each contract represents 1,000 barrels of West Texas Intermediate (WTI) crude oil. Quotes for the contract are in U.S. dollars, with 0.01 per barrel the minimum price fluctuation, which is equal to $10 per contract.
CME Group futures contracts can be settled by physical delivery at the option of the seller of the futures contract.
Physical oil is delivered to a hub in Cushing, Oklahoma, although most oil contracts are settled through cash. Oil futures stop trading on the third day before the 25th calendar day of the month prior to the contract month.
In addition to the CME Group’s oil contract for WTI, you can also trade futures on Brent crude oil. The futures for Brent oil trade on the Intercontinental Exchange (ICE) under the symbol B and they are also for a contract amount of 1,000 barrels.
Both the NYMEX and ICE have electronic access, so anyone who has a brokerage account with a futures broker can trade in oil futures using an electronic trading platform. Keep in mind that brokers have the right to deny access to futures trading to anyone they deem too inexperienced or otherwise unsuited for the risks involved.
Once you’ve been approved to trade futures by your broker, you’ll need to post what is known as a performance bond. This is an amount of cash equivalent to 2% to 5% of the futures contract value. The additional deposit is needed to ensure that you have the financial means to hold the futures position.
In order to trade oil futures, you are required to provide the initial margin for the position, as well as the maintenance margin amount needed to keep the trade open. The amount of initial and maintenance margin varies depending on the amount of money in your account and the market price of the futures contract. Brent oil futures generally cost more to margin because of the higher price of the contract.
How to Buy Oil Futures
Best Futures Brokers
We’ve listed 3 highly respected oil futures brokers below. You can buy crude oil stock futures here, request assistance from the broker or take advantage of other investment options.
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Buy Oil Futures
Futures trading requires a larger minimum deposit than trading in many other types of tradable assets. In addition to the higher initial deposit and margin costs, trading futures requires that you become extremely familiar with the market you plan to trade.
The oil market has enough volatility to make short term strategies worthwhile. Many online brokers like Interactive Brokers even offer a reduced margin requirement for day traders. You can buy crude oil stock, get in quickly and get out just as quickly.
Furthermore, if you have a sufficient account balance to weather significant swings, then holding a long- or medium-term position in the oil market could be very lucrative if your call on the market aligns with the underlying trend.
Want to learn more about buying futures? Check out Benzinga’s guide for the best futures brokers, how to trade futures and how to trade bitcoin futures.