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The Ins and Outs of Trading Crude Oil Futures
Futures contracts can be used in a variety of ways. When trading crude oil futures, it comes down to knowing the market.
Published September 15, 2024.
In this article
What Are Crude Oil Futures?
Current Trends in Crude Oil Futures Prices vs. Historical Data
Key Factors Influencing Crude Oil Futures Prices
Overview and Characteristics of West Texas Intermediate (WTI) and Brent Crude
Show More
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.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT futures. All the information in this blog is purely educational and should not be considered as advice.
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What Are Crude Oil Futures?
Crude oil futures are standardized contracts traded on exchanges, obligating the buyer to purchase and the seller to deliver a specific quantity of crude oil at a predetermined price on a future date.
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
Potential Advantages
- Liquidity: High liquidity ensures easy entry/exit at competitive prices.
- Leverage: Control large positions with minimal capital, amplifying potential returns.
- Diversification: Add commodities to reduce account risk.
- Price discovery: The futures market reflects market expectations for crude oil.
- Hedging: Lock in prices to manage risk and stabilize costs.
Potential Risks
- Market volatility: High volatility from geopolitical events and supply-demand shifts could cause large price swings and potential losses.
- Leverage risk: Leverage amplifies both gains and losses, potentially leading to substantial financial losses if the market turns.
- Speculation: The speculative nature of crude oil futures could increase market volatility and risk of significant financial losses.
Current Trends in Crude Oil Futures Prices vs. Historical Data
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.
Advancements in technology, like AI and blockchain, might boost accuracy and efficiency in trading. Energy policy shifts towards renewables may lower long-term crude oil demand, affecting prices and market volatility.
» 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.
Case Study
1973 Oil Crisis: OPEC's oil embargo during the Yom Kippur War led to a quadrupling of oil prices, causing global economic disruptions and highlighting geopolitical risks in oil dependence.