What are oil futures and how do you trade them?

What are oil futures?

Oil futures are financial contracts in which a buyer and a seller agree to trade a specified number of barrels of oil at a fixed price set for a future date. Crude oil futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the expiration of the contract.

The level at which a futures contract is currently trading is also the price where the upcoming transaction will take place. For example, if an oil future is currently listed at $75, this’ll be the level at which the asset will be traded when the contract reaches its expiry date (or ‘settles’). The person buying the oil is said to be ‘long’ on the future, while the seller is ‘short’.

The contract will clearly state the following:

• Date of settlement or expiry
• Number of barrels of oil to be traded (typically 1,000 barrels)
• Quality and type of oil to be traded
• Method of settlement (physically or cash settled)

What is oil futures trading?

Oil futures trading is the act of buying and selling crude oil futures. Traditionally, you’d trade crude oil futures if you were an oil producer or used oil as an industry input. The contracts remove uncertainty the from future prices, thereby lessening risk. You can also use oil futures to predict on oil prices.

For instance, if you believe that the price of Brent crude will increase above its current spot price of $130 per barrel, you’d assume oil futures would trade higher than that – at $132.

If you decide to go long, you’d ‘buy’ an oil future. So, if your prediction is correct, and the spot price moves (as per your prediction) to $140 by expiry, you’d earn a profit of $8 per barrel on settling the contract. If, contrary to your prediction, the spot price drops to $120 by expiry, you’d have made a loss of $12 per barrel.

Futures are traded on exchanges that standardise the terms of each contract. Listed oil futures are settled either physically or in cash. When settled physically, actual barrels of oil are delivered. When settled by cash payment, the difference between the future price and the spot market price is paid to the relevant party to the contract.

With us, you won’t have to deliver or take delivery of any physical barrels of oil. This is because you’ll trade exclusively on the prices of oil futures using contracts for differences (CFDs)^* – that track the underlying market.

^*Note that CFDs are leveraged products, meaning you can win, or lose, a significant amount more than your initial deposit.

Why trade oil futures?

1. Avoid overnight funding charges
2. Trade with leverage
3. Go long or short
4. Hedge existing positions
5. Take a position on Brent crude or WTI (US crude)
6. Get automatic rollover at expiry

Avoid overnight funding charges

With us, futures positions have no overnight funding charges. This means that you’ll trade oil futures if you’re looking to take a longer-term position on an underlying market. Bear in mind, however, that futures have a wider spread than spot (‘cash’) positions.

Trade with leverage

CFDs are leveraged products, which means you only need to pay an initial deposit – called margin – to open a position that provides increased market exposure.

When trading with leverage, keep in mind that your profit or loss is calculated using the whole position size and not just the margin, meaning your profits and losses will be magnified.

Before trading, ensure you understand how leveraged products work and determine if you can afford to risk losing your money. Take precautions by making use of our risk management tools.

Hedge existing positions

Hedging with oil futures allows you to control your risk exposure. For example, if you own shares in a Brent crude producing company and you believe it might depreciate, you could short an oil future. If your prediction is correct, the profits you make from shorting your position could offset a fraction of your losses.

Note that when hedging you’ll still incur costs, therefore it’s important that you incorporate these into your hedge calculations and projections.

Take a position on Brent crude or WTI (US crude)

When trading oil futures, you can choose from two dominant markets – Brent crude and West Texas Intermediary (WTI), also known as US crude. Brent crude is produced from oil fields in Europe’s North Sea, while WTI is produced in North America.

Brent crude is used as a benchmark when trading oil contracts, futures and derivatives internationally, while WTI is a mostly used as a yardstick in Northern America.

The oils’ price differences or ‘quality spread’ are due to their different characteristics. Both oils are light and sweet, making them easier to be refined and processed by petrol producers.

With us you can also trade Crude Palm Oil, Heating Oil and London Gas Oil.

Automatic rollover at expiry

If you’d prefer to not close your position on or before the expiry date, you can change the settings in your account so that it can be rolled over automatically.

By rolling over a contract’s expiry date, you delay the asset’s delivery to the following month, and subsequently avoid incurring costs and obligations associated with settling the future contract. This is often done when you don’t want to take delivery of the physical asset such as barrels of oil.

When trading CFDs, you can set up automatic rollover instructions by logging in to your account, selecting ‘rollovers’ from the ‘Settings’ tab and then following the instructions. Once the rollovers have been set up on your account, you’ll receive a confirmation email.

How to trade oil futures

1. Make sure futures are how you want to trade oil
2. Understand how oil futures trading works
3. Create your account and log in
4. Pick your oil futures market and expiry
5. Set your position size and manage your risk
6. Place your oil futures trade

Make sure futures are how you want to trade oil

Besides trading oil futures, you can also trade the spot oil market (called our ‘cash’ market) or oil options.

Understand how oil futures trading works

With us, you can trade on price movements on oil futures markets using CFDs. CFDs are traded with the contract’s value already at specified amount ($) per point or ‘tick’ of the underlying asset’s price. Note that CFDs are quoted in US dollars for oil.

Create your account and log in

With us, you can trade oil futures via CFDs. You can use these derivative products to take a position on rising and falling prices on oil futures.

If you’re not familiar with trading oil futures, you can open a demo account to practise in a risk-free environment with $200,000 in virtual funds. Once you’re confident, you can open a live account – with no obligation to fund or trade until you’re ready.