Oil Futures Trading
No longer exclusively for elite traders, oil futures trading became more accessible for so-called common investors as a result of events in the 1970s that altered the market. "And he shall bring it to Aaron's sons the priests: and he shall take thereout his handful of the flour thereof, and of the oil thereof, with all the frankincense thereof; and the priest shall burn the memorial of it upon the altar, to be an offering made by fire, of a sweet savour unto the LORD:" (Leviticus 2:2). It used to be true that this field was pretty much a mystery to most traders. In addition to being unfamiliar with that market, the majority of traders lacked the capital needed to open the account. Therefore, so-called common investors lacked both the ability and the opportunity. But since the 1970's, opening a commodity futures trading account has been within the reach of many more prospective traders. And the business of trading oil can be a very lucrative venture. In fact, where the benefits are concerned, crude is often referred to as the money machine.
First of all, trading was affected in the 1970's not only by turmoil in the Middle East, but also by world politics in general. Added to that, were the effects of global warming. Furthermore, ethanol, hybrid cars and advances in technology all played their part. As a result of this, prices began to change at a much more rapid rate. And due to the change in the trading range of prices, opening a commodity futures trading account, and thus obtaining the chance to enjoy the lucrative benefits of crude oil, became more accessible to the general public. This is because the contracts used were for a minimum of a thousand barrels. The term cracked is used when describing the process of breaking down one barrel into 42 gallons of gas. And so, when an individual considers how expensive 42 gallons multiplied by the 1,000 barrels would be, then it is understandable that only the wealthy could afford to become involved. In other words, instead of remaining the exclusive domain of the very rich, the oil futures trading market experienced a dramatic change.
By definition, futures trading implies the trading of commodities, such as oil. And, also by definition, engaging in oil futures trading involves agreements to either deliver or purchase oil at some determined future point at a pre-determined price. Incidentally, the features of sweet vs. sour and light vs. heavy have an influence upon the price. According to experts, refiners prefer light sweet crudes, such as Brent. Light is the term used to describe this kind because of the high API degree, which means a high viscosity number. And the reason behind the refiners' preference is twofold: sulphur and yields. In the first place, light sweet crudes have a low sulphur content. Moreover, this kind of crude has a higher yield of valuable products. Heating oil is an example of these products. Further examples are jet and diesel fuel, as well as gasoline. Also, crudes that are heavy sour, such as Arab oil, require much more time and effort to refine. And as far as sulphur is concerned, sweet contains 0.5% as opposed to a sour such as Nigerian 'Sweet Bonny' which has 3.5%.
When engaging in oil futures trading, an individual purchases the right to buy or sell a thousand barrels. Attached to these barrels of crude is both a set price and a set expiration date. However, a person should realize that this does not imply an obligation to either buy or sell. By the way, a purchase is known as a call, and the proper term for selling is a put. Further, the pre-determined price is referred to as the strike price. And the amount of money paid for the crude futures option is known as a premium. However, bear in mind that although the investor is not obligated to either call or put, if the contract is not sold by the expiration date, after that date the contract becomes worthless. Investors arrive at their price by first examining projected supply and demand reports. Subsequently, they enter a bid that displays what they have concluded to be the accurate price of trading oil futures. And despite the fact that there are many different kinds of crude, and although prices differ just as much, globally speaking they all move in a similar direction and at the same time. Within this market, the price similarity is known as correlation. Indeed, correlation, arbitrage and volatility are major profit components.
To understand these components of oil futures trading, an individual must first become acquainted with Exchange Traded Funds, also called ETF's. Exchange Traded Funds keep an eye on virtually every commodity within the futures markets. The oil futures trading market is monitored by an ETF known as the USO. Incidentally, the reason a person can trade options on the USO ETF is that it is traded similar to stocks. To begin with, profits can be earned from a correlation when one crude's price increases by a certain amount and another kind should, based on the investor's calculation model, also increase by a relative amount. But with arbitrage, profits are earned from non-permanent price differences. In other words, the investor purchases the crude that is cheaper than the relatively more expensive one, while selling the higher priced one simultaneously. Then when the prices return to their normal level, the investor closes both trades. Lastly, in order to earn profits from volatility, knowledge of both the product to be traded as well as market operations related to that product is essential. That is to say, there are a number of variables involved with volatility profits.
Finally, a person should be aware that premiums include neither commissions nor any kind of fee. However, these three represent the maximum amount of loss that the speculator risks from buying an option. Nevertheless, just because the field is easier to enter does not negate the fact that, largely due to the volatility of the market, these investments are very risky. Also keep in mind that, even though an individual no longer needs to be wealthy to engage in oil futures trading, the minimum start up capital tends to be around $5,000. But all in all, especially if one bases a trade decision on technical analysis, even those who are not wealthy can take a chance on accumulating wealth with oil futures trading.
First of all, trading was affected in the 1970's not only by turmoil in the Middle East, but also by world politics in general. Added to that, were the effects of global warming. Furthermore, ethanol, hybrid cars and advances in technology all played their part. As a result of this, prices began to change at a much more rapid rate. And due to the change in the trading range of prices, opening a commodity futures trading account, and thus obtaining the chance to enjoy the lucrative benefits of crude oil, became more accessible to the general public. This is because the contracts used were for a minimum of a thousand barrels. The term cracked is used when describing the process of breaking down one barrel into 42 gallons of gas. And so, when an individual considers how expensive 42 gallons multiplied by the 1,000 barrels would be, then it is understandable that only the wealthy could afford to become involved. In other words, instead of remaining the exclusive domain of the very rich, the oil futures trading market experienced a dramatic change.
By definition, futures trading implies the trading of commodities, such as oil. And, also by definition, engaging in oil futures trading involves agreements to either deliver or purchase oil at some determined future point at a pre-determined price. Incidentally, the features of sweet vs. sour and light vs. heavy have an influence upon the price. According to experts, refiners prefer light sweet crudes, such as Brent. Light is the term used to describe this kind because of the high API degree, which means a high viscosity number. And the reason behind the refiners' preference is twofold: sulphur and yields. In the first place, light sweet crudes have a low sulphur content. Moreover, this kind of crude has a higher yield of valuable products. Heating oil is an example of these products. Further examples are jet and diesel fuel, as well as gasoline. Also, crudes that are heavy sour, such as Arab oil, require much more time and effort to refine. And as far as sulphur is concerned, sweet contains 0.5% as opposed to a sour such as Nigerian 'Sweet Bonny' which has 3.5%.
When engaging in oil futures trading, an individual purchases the right to buy or sell a thousand barrels. Attached to these barrels of crude is both a set price and a set expiration date. However, a person should realize that this does not imply an obligation to either buy or sell. By the way, a purchase is known as a call, and the proper term for selling is a put. Further, the pre-determined price is referred to as the strike price. And the amount of money paid for the crude futures option is known as a premium. However, bear in mind that although the investor is not obligated to either call or put, if the contract is not sold by the expiration date, after that date the contract becomes worthless. Investors arrive at their price by first examining projected supply and demand reports. Subsequently, they enter a bid that displays what they have concluded to be the accurate price of trading oil futures. And despite the fact that there are many different kinds of crude, and although prices differ just as much, globally speaking they all move in a similar direction and at the same time. Within this market, the price similarity is known as correlation. Indeed, correlation, arbitrage and volatility are major profit components.
To understand these components of oil futures trading, an individual must first become acquainted with Exchange Traded Funds, also called ETF's. Exchange Traded Funds keep an eye on virtually every commodity within the futures markets. The oil futures trading market is monitored by an ETF known as the USO. Incidentally, the reason a person can trade options on the USO ETF is that it is traded similar to stocks. To begin with, profits can be earned from a correlation when one crude's price increases by a certain amount and another kind should, based on the investor's calculation model, also increase by a relative amount. But with arbitrage, profits are earned from non-permanent price differences. In other words, the investor purchases the crude that is cheaper than the relatively more expensive one, while selling the higher priced one simultaneously. Then when the prices return to their normal level, the investor closes both trades. Lastly, in order to earn profits from volatility, knowledge of both the product to be traded as well as market operations related to that product is essential. That is to say, there are a number of variables involved with volatility profits.
Finally, a person should be aware that premiums include neither commissions nor any kind of fee. However, these three represent the maximum amount of loss that the speculator risks from buying an option. Nevertheless, just because the field is easier to enter does not negate the fact that, largely due to the volatility of the market, these investments are very risky. Also keep in mind that, even though an individual no longer needs to be wealthy to engage in oil futures trading, the minimum start up capital tends to be around $5,000. But all in all, especially if one bases a trade decision on technical analysis, even those who are not wealthy can take a chance on accumulating wealth with oil futures trading.
Oil Futures Trading
![]()
Reviewed by Anonymous
on
6:06 PM
Rating:
