Everything you need to Know about Trading Oil Futures

7 min read

According to recent estimates from the US Energy Information Administration (EIA), the United States alone produced an average of nearly 11 million barrels of oil per day in 2018. When compared to numbers from the year before, this represents an incredibly 17 percent increase.

While the US—and other countries around the world—should certainly be making an effort to promote alternative energy sources, there is no doubt that oil industry plays a significant role in the global economy. As a result, there are traders all around the world who actively look for oil contracts that will be worth more in the future than they are in the status quo.

With an oil futures contract, an individual has the right to buy or sell petroleum at a specific price on a specific date in the future. These contracts are a bit different from options contracts, which give you the right to purchase commodities but do not impose any obligations.

As each futures contract comes to a close, its price will fluctuate up and down. If the demand for oil is much higher than it was when the contract was initially purchased, you will be in a position to potentially earn a profit. Just as you would expect when trading volatile assets in any industry, successfully learning how to trade oil is all about correctly timing the market.

In this article, we will discuss some of the most important things for active traders to know about the oil futures market. We will also discuss some of the ways that you can maximize your potential for returns while minimizing your exposure to systematic risk. As long as oil remains an essential part of the global economy, there will be ongoing profits to be made.

Understanding what Drives the Price of Oil

The price of oil, just like any other commodity, is actively influenced by changes in supply demand. When all else is equal, increases in demand or decreases in supply will cause the price of oil to increase. At the same time, decreases in demand or increases in supply will cause the price of oil to decrease.

The market for petroleum futures can be rather complex, due to the fact that there are many unpredictable externalities that can cause supply and demand to rise or fall. Here are a few scenarios when this can happen:

  • Agreements between oil producers and various countries, specifically countries who are members of OPEC
  • Changes in regulations, taxes, and the feasibility of alternative energy sources
  • Sudden discoveries of new oil reserves
  • Development of new technologies that make oil more accessible or cheaper (such as fracking)
  • Public views on the use of oil (something that changes surprisingly often)
  • Seasonal cycles (peak demand in summer and cold winters) and weather conditions in oil producing regions

As you would probably expect, successfully trading oil futures will require a significant amount of fundamental analysis. This means that if you want to succeed, you will need to pay close attention to actively developing stories in the news. Additionally, you will also want to conduct a significant amount of technical analysis—choosing a few favorite technical indicators can help you gauge the strength and direction of any given price trend.

Familiarizing yourself with the Oil Market

Every Wednesday, the EIA will release an energy stock report, which is where most crude oil traders will get their information. Unsurprisingly, this is the time of the week where petroleum futures markets are among their most volatile.

To take advantage of this volatility—and other opportunities that emerge throughout the week—you will need to familiarize yourself with the market as a whole.

  • Oil futures trade on the New York Mercantile Exchange, between 9:00 am and 2:30 pm Eastern Time (throughout the course of the entire year).
  • Futures contracts are usually for 1,000 barrels and the prices will almost always be quoted per barrel. Over the past year (as of 4/16/2019), a barrel of oil (WTI) has traded for as low as $42.36 per barrel and as high as $76.90 per barrel. Within a given trading day, the price range is usually $10 or less.
  • There are multiple different types of oil available. Light Sweet is the most frequently traded grade of crude oil. Brent Crude also has high trading volumes.
  • Oil traders are almost always trading contracts tied to unprocessed, crude oil. Processed oil (such as automobile gasoline) is usually purchased by the end distributor, rather than speculative traders.

The United States (along with Russia and Saudi Arabia) is among the three largest crude oil producers in the world. Additionally, the American Dollar (USD) influences the global price of oil more than any other currency. As the dollar decreases in relative value, oil prices will increase in response. Consequently, many traders will hedge their wealth by simultaneously trading USD on the forex market along with oil futures.

Creating a Strategy that Works for You

Anyone who is hoping to succeed as a futures trader will certainly need to pay attention to the EIA’s weekly report. However, there are quite a few other things that all traders will need to pay attention to as well.

  • Oil prices react to pivot points better than most other commodities. Identifying short-term channels of support and resistance can help enhance your day trading strategy.
  • Oil markets can be very volatile, especially when geopolitical news suddenly emerges. In response, it is generally wise to close all of your petroleum futures positions at the end of each trading day.
  • The Stochastic Relative Strength Index (SRSI) is among the best technical indicators for oil traders. This 20 period indicator can be used in both bullish and bearish markets and will help subtle trends become more apparent.
  • Futures traders will have the option to purchase contracts that are either at the market price, above the market price, or below the market price. Purchasing at the market price is usually considered easiest, though purchasing at different price points can help diversify your current position.
  • Price anomalies sometimes occur in the oil market, meaning that you may have occasional opportunities to scalp crude oil contracts. This strategy focuses on finding mismatched prices and trading with low degrees of risk.

The NYMEX is a platform that is often compared to the NYSE, but there are quite a few things that make it unique. Because these contracts have set expiration dates, they are not the same as stocks, which can be held for however long you might prefer. The volatility of these contracts will peak as the expiration date approaches. If the exercise price of your contract appears as if it will be significantly different than the market price, the value of the contract will either increase or decrease in response.

Oil futures are the most popular futures contract traded on the NYMEX every day. This is due to the fact that oil is always in demand and is heavily tied to the swings of international politics, the value of the USD, and ongoing developments in the global economy as a whole. Ideally, an oil futures trader will trade on a daily basis and will have a relatively high level of risk tolerance. Depending on your goals, risk-reward preferences, and trading restrictions (such as time), you should be able to develop a strategy that works for you.


If you hope to successfully trade oil futures contracts, the first thing you will need to do is familiarize yourself with each of the variables involved in this very dynamic marketplace. As is the case with trading any commodity, the more you can know about the driving forces behind oil prices, the more likely you will be able to correctly time the market and open profitable positions. With the right knowledge, technical indicators, and trading strategies in hand, you can become a successful commodities trader.

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