Tuesday, January 08, 2013

Understand Crude Oil Futures Trading

I have been trading Crude Oil for some time now. Many people may not be very familiar on how to start trading crude oil. I will like to explain the details here in this post.

Crude Oil being one of the main important commodity in the world as energy source. Crude is the raw product, and it can be refined into different products to get the maximum values out of it. The most common petroleum product are gasoline, fuel oil, petrol, etc

There are different types of Crude Oil namely the light crude, heavy crude, sweet crude and sour crude.
Light Crude will have less density of viscosity, heavy crude will have higher density of viscosity. Sweet crude will have less amount of sulfur while the sour crude will have high level of sulfur.

In term of quality, the lesser the density of viscosity and less amount of sulfur is considered better quality and with these kind of crude oil the amount of time to refine is lesser thus more efficient. Crude Oil is the single largest product traded in the world and also the world's first trillion dollar industry. With such high volume of the Crude Oil industry it makes trading in its futures a lot more liquid and volatile at the same time for short term trading.

Like any other stocks traded in an exchange, the Light Crude Oil futures has a ticker symbol of CL and it is traded in NYMEX (New York Mercantile Exchange). It has futures on all months, and the last trading day is 3 days prior to the 25th calendar day of the month preceding to the delivery month.

Price of the future is quote in dollar and cents (e.g. USD93.45) and that will be the price of 1 barrel. Each contracts will be 1,000 barrels and each tick (in one cent) will represent USD10.

So take back the example of USD93.45 / barrel means you're holding USD93.45 * 1,000 = USD 93,450 worth of Crude Oil in a single future contract.

Many traders like to trade crude oil futures because of the high leverage. In order for you to trade a USD 93,450 worth of crude oil (meaning one single contract) you will only need to have a margin of USD8,775.  that is more than 10 times the leverage.

There are other exchanges which traded Crude Oil listed below:
- Intercontinental Exchange (ICE, Dubai Mercantile Exchange (DME), Multi Commodity Exchange (MCX) and others.

To trade Oil Futures, you will need to know some of the factors that impact the price of oil.

US Dollar
Because oil are mainly trade in US denomination, the movement of US Dollar will often impact the price of oil. Higher US Dollar means the price of oil getting more expensive and thus resulting is less demand and less demand means the price will gets lower.

Supply Countries
The middle east counter for more than 60% of the supply for Oil in the world market and before Iraq was at War, Iraq used to be one of the important supplier of oil in the market and with the War coming in the play, it is party account for the hike in oil price ever since the halted production. So you will need to be very careful on the any major news happening to these countries namely (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Russia and United State.

Alternative Energy
When global warming had started to become more and more alarming. It pushes new development of more green energy which may be a substitute to crude oil as an energy source. The newly developed energy may impact the price of Crude Oil as well.

On the other hand, it is always good to monitor the report provided by EIA (www.eia.gov) in order to know the production, petroleum balance sheet, usage of crude oil products. The report will be out every Wednesday 10.30am eastern time or delayed one day if holiday.

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