It’s fair to say that crude oil is the most important commodity in the world. The world has an insatiable demand for oil, a thirst that’ll only increase as the world’s population grows (or until we discover a reliable alternative for transportation). Oil companies produce record profits and are some of the largest companies in the world. Factor in the success of petroleum-based commodities, like gasoline, and you can see oil’s impact.
Oil futures are some of the most widely-traded and popular futures contracts on the market. These assets allow investors to trade in black gold and leverage relatively small amounts of capital to control large amounts of oil, as well as hedge against downturns in the market and take advantage of spikes in demand and other price factors.
Brent Crude in particular is one major classification for trading oil, specifically light sweet crude oil (oil that flows freely, has a low density, and has a low sulfur content), the most in-demand oil in the market. Brent Crude is a major benchmark, so it makes sense to study futures based on the commodity.
Here, we’ll talk about Brent Crude futures, and will discuss the pertinent details you need to know in order to engage in Brent Crude futures contracts and take advantage of price movements in the market.
Brent Crude futures represent Brent Crude oil being sold on the global market. Brent Crude comes from the North Sea in Europe, so it is primarily a European commodity (just as West Texas Intermediate is a major benchmark for North America).
These futures contracts are sold on several exchanges; we’ll take a look at the contracts offered by the IntercontinentalExchange (ICE). (The New York Mercantile Exchange, or NYMEX, doesn’t offer direct Brent Crude futures; instead, it offers Brent Look-Alike crude oil futures that are based on the ICE contracts.)
A standard Brent Crude futures contract from ICE has the Brent Crude oil futures symbol of ‘B’, with a contract size of 1,000 barrels (equal to 42,000 U.S. gallons). The price is quoted in U.S. currency per barrel and rises in price to the equivalent of one cent per barrel (or $10 at a time per contract). These contracts are valid for 36 consecutive months in most cases.
Futures come with margin requirements, or, the required amount of money you need in your account to trade. Margin varies by the contract’s end date. For the September 2012 – November 2012 expiry, for example, the margin rate is $5,300 per contract. The longer the expiry, the lower the margin (in general).
You can buy mini contracts for Brent Crude futures. These offer lower contract sizes and lower margin rates, which is good for investors who want to play in oil but don’t want to or can’t take on a larger contract.
You can find light sweet crude E-mini future contracts (the ‘E’ refers to electronic) on NYMEX. These contracts have the symbol of ‘QM’ with a contract size of 500 barrels and a minimum fluctuation of $0.025 per barrel. The initial margin requirement for an E-mini contract that expires in September, 2012 is $3,443.
Factors that Impact Price
Brent Crude, just like any other kind of oil, is a fungible global commodity that is impacted by many different factors.
The North Sea can be rough, but it is not as prone to hurricanes and other severe storms of that nature as the Gulf of Mexico, so weather is not as threatening to Brent oil production as it is Gulf of Mexico oil production. Investors largely look to economic events and upward pressure on demand, as well as constraints on supply.
One long-term upward pressure on demand is growing consumption fueled by rising populations in China, India, and other developing countries. As these countries develop, their demand for petroleum rises. This gradual increase in demand is the key factor influencing a rise in the price of not just Brent Crude but WTI, Dubai Crude, and other key sources of oil.
The last few years have counteracted that rise in price somewhat by depressing economies across the globe, resulting in less demand for any type of oil (particularly in Europe).
On the flip side, speculation has resulted in dramatic price volatility over the past decade and shows no signs of decreasing.
The Brent Crude futures price chart below gives you a visual of where prices have been over the past six years:
As you can see, the massive spike downward in 2008 came with the global recession, and prices still have not recovered to the pre-recession peak. The chart below gives you a better idea of Brent Crude prices from 1983:
One fact that may cause Brent Crude to continue to rise in price is oil reserve depletion. It’s estimated that anywhere from 60% to 75% of recoverable reserves have been extracted. Production in the North Sea peaked in 1999.
Traders should also keep an eye on Russian oil production, as it has begun to compete against Brent Crude in Europe, one of the main markets for the oil blend.