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 contract’s expiry.

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 from future prices, thereby lessening risk. You can also use oil futures to speculate 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 speculation 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.

Remember that trading futures means you’re using leverage, which carries a high risk of losing more than your deposit. All profits and losses are based on the full position size and not the initial outlay. Always take steps to manage your trading risk.

Futures are traded on exchanges, which standardise each contract’s terms. Listed oil futures are either settled physically or via a cash payment. When settled physically, actual barrels of oil are delivered - we don’t offer this. When settled via a cash payment, the difference between the future price and the spot market price is paid to the relevant party in the contract.

We offer access to US-listed futures on a wide range of markets, such as commodities – including oil – stocks, ETFs and futures options. All this, on an award-winning platform,¹ with low commissions, and fantastic trading content from our colleagues at tastylive. Note that listed futures are either physically delivered or financially settled.

We offer over-the-counter (OTC) futures on oil, too. You can take a position using spread bets (forwards only) or CFDs. Again, an award-winning platform¹ is all yours. You’ll speculate on the underlying market price, without entering the futures contract yourself and won’t have to deliver or take delivery of any physical barrels of oil. Plus, there are possible tax benefits.²

Remember that trading on leverage carries risk – plus, oil can be an especially volatile market. You should have a solid risk management strategy in place before opening any positions.

Why trade oil futures?

1. Low costs and commissions
2. Trade with leverage
3. Go long or short
4. Access popular markets like Brent crude or WTI (US crude)
5. Hedge existing positions
6. Rollover at expiry

Low costs and commissions

When you trade listed futures, you’ll pay as little as $1.25 opening and closing commission per contract. With micro futures, it’s even lower – at just $0.85 per contract.

With OTC futures, your positions have no overnight funding charges. Bear in mind, however, that futures have a wider spread than spot (‘cash’) positions.

Trade with leverage

Whether you choose to trade listed or OTC futures, you’ll pay only a deposit (called margin or buying power) to open a position and get full exposure. While leverage can have significant benefits, 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.

Access popular markets like Brent crude or WTI (US crude)

When trading oil futures, you can choose from two dominant markets – Brent Crude and West Texas Intermediary (WTI) known as US Crude. Brent crude is produced in oil fields in Europe’s North Sea, while WTI is extracted 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 varying properties. Both oils are light and sweet, making them easier to be refined and processed by petrol manufacturers.

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

Rollover at expiry

Understanding expiry lets you to maintain your desired market exposure while avoiding unwanted delivery obligations or contract settlements. Always make sure you're fully aware of the expiry terms for each instrument you trade.

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.

US-listed futures have rather standardised expiry procedures. You’ll normally close your positions before expiry by offsetting them with opposing trades. Holding to expiry may require physical delivery or cash settlement, which isn’t always possible. Manual rollover involves closing the current position and opening a new one in the next contract.

When trading spread bets and CFDs, you can set up automatic rollover instructions by logging in to your account, selecting ‘rollovers’ in your ‘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 oil spot 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 listed futures, spread bets (on forwards) and CFDs.

When trading listed futures, a contract’s size (full-point multiplier) will determine the value of each ‘tick’ and point. For example: crude oil has a tick value of $10 per point. Full point multiplier $1,000 x tick size $0.01 = $10 per point. With spread bets, you have greater control since you can set your own amount (£) per tick. CFDs are traded with the contract’s value already at specified amount (£) per point or tick of the underlying asset’s price. Note that some CFDs are quoted in pounds, whereas others for oil are in US dollars.

Create your account and log in

You can open a listed US options and futures account, a spread betting account, a CFD account – or all three. If you decide to open all three accounts, our award-winning platforms will enable you to easily switch between them.¹

If you’re not familiar with trading oil futures, you can open a demo account to practise in a risk-free environment with £10,000 in virtual funds. Note, however, that you can only trade OTC futures and forwards on this account and not listed futures. Once you’re confident, you can open a live account – with no obligation to fund or trade until you’re ready.

Set your position size and manage your risk

If you're trading on our US options and futures account, click on 'buy' to go long or 'sell' to go short. Alternatively, click on the ask (long position) or the bid (short position). Then, set your position size. To manage your risk, you can set a bracket order.

If you're using our spread betting or CFD trading platform, you'll click on 'buy' to go long or 'sell' to go short. Now, set your position size and manage your risk. Our risk management tools on the deal ticket include limit orders and normal, trailing and guaranteed stops.