Day Trading Crude Oil Futures Explained
Last updated on March 31st, 2020
Light sweet crude oil (CL) is a fantastic product to day trade. It has great liquidity and you soon know whether you’re right or wrong in a trade as it moves quite a bit.
Because of this, the crude oil futures markets is one of those highly profitable products where discipline is vital to your success. it. It’s a fast moving market and at $10 a tick, you can see relatively large p/l swings just trading a single contract.
Crude Oil Futures Trading Basics
Trading CL on the CME Group (Chicago Mercantile Exchange) Globex is actually open for nearly 24 hours a day during the week (6:00pm – 5:15pm EST) the primary pit crude oil trading session is just 5½ hours long (9:00am to 2:30pm EST) which are some pretty short trading hours.
Focusing on the latter, you generally get somewhere in the region of 100-250 ticks in range and 100-250k contracts traded and frequently it can be considerably more active. This is for the closest contract to expiration before contract roll (trading volume tips over into next contract month).
A crude oil contract roles over every month and in fact, many traders look to profit from spreading different contract months against each other, looking to profit from changing expectations of the value of the commodity over time.
It’s important to know when to roll into the new front month as crude oil is a future that is settled by delivery – if you’re long and you let the future expire, you may end up with barrels of crude oil sitting in your garage.
Volatility varies not only from week to week and month to month, but is also dependent on the day of the week.
Volume tends to pick up throughout the week and volatility is usually elevated around the weekly crude oil inventory report on Wednesdays. This report has the potential to whip the market back and forth so dramatically that many oil futures traders step back for a few minutes to let the dust settle before taking further trades.
Crude Oil Futures Contract Basics
Each contract – 1,000 barrels
Price Quote – USD
Price Fluctuation Minimum – $.01/barrel
Termination Of Trading – Trading in the current delivery month shall cease on the third business day prior to the twenty-fifth calendar day of the month preceding the delivery month.
What Drives The Price Of Crude Oil?
It’s not just inventory reports that move oil prices. Crude oil can see good trends in part due to speculation. When oil spiked to record highs in 2008, speculators were blamed for pushing prices higher. Whilst it is certainly a speculator driven market to an extent, there are other factors to take into account.
Same goes for the plummet in 2014 and 2015.
From a supply and demand aspect, the impact of the level of growth in countries such as China, India and Brazil must be considered. The better the global economy, the greater the demand from these countries will be. This is also why oil tends to move in tandem with the stock market.
But there comes a point where higher prices become seen as a hindrance to growth. It’s also important to assess the way the value of the dollar impacts oil prices.
Oil futures contract price are in USD and it has an intrinsic value. So any strength or weakness in the dollar has the potential to inversely affect oil prices – i.e. if you want to buy something but your money is worth less, the cost in terms of your money goes up. This goes for inflation too.
Over time as currency devalues, anything with intrinsic value should rise in price in terms of the currency. So the varying degree of inflation (or deflation) will impact oil prices too.
Then of course comes the issue of global tensions and particularly those in the Middle East where much of the North American oil comes from.
The simple fact is that the world is dependent on oil and a vast amount of it comes from this highly volatile region. Any conflict that hints at the possible disruption to crude oil supply can quickly send prices higher.
Trading Crude Oil Futures – Don’t Have Tunnel Vision
Why do you need to know this information to day trade crude then?
Because economic reports also affect oil prices and when an important figure is released out of line (differing from analyst pre-release estimates), markets must reprice to account for this.
Middle East tensions might be ongoing, but there are specific points in time when important developments take place and the market moves quickly.
Crude oil futures trading is a good choice for an experienced day trader and new traders who understand that trading is a business. Because the market has a good number of influences driving price and because when a lot of business needs to be done the level of liquidity can move the market quickly, crude oil is a market where there’s lots of action for a day trader to profit from.
You can contact our support staff (all of them are traders) to see how you can get started with a Crude Oil Futures trading strategy that can help you profit from this wonderful market.