Oil futures easily constitute one of the most traded commodities in the futures market today. It’s no surprise; oil is the world’s most important commodity and the most heavily-traded one by far. As a result, oil futures offer one way to tap into this vibrant and dynamic market.
Learning how to invest in oil futures means understanding the various markets that offer these assets and how you can break into the market. It also means understanding the underlying mechanics of oil futures and how they operate so you can best position yourself.
Anybody with the right type of broker can buy oil futures. Tradestation is one reputable broker to offer futures trading as well as stocks, etfs, bonds, forex and much more.
An Overview of Oil Futures
First, we’ll briefly cover oil futures and what they represent.
An oil future is a contract between two people: a buyer and a seller. The contract is an agreement, or promise, for the buyer to purchase oil at a certain price in the future (the spot price) at a certain date in the future (the contract’s maturity) from the seller. For example, you could purchase a futures contract to buy oil at $95 per barrel with a delivery date three months from now. You would have an obligation to take delivery of the oil (or settle for cash) for $95 a barrel three months from now, regardless of what the actual price of oil is at the time.
You can see how you can profit or lose money by buying oil futures. If you bought futures for $95 a barrel but the price at delivery was $92, you’d lose $3 per barrel because you would essentially overpay by that amount for every barrel. Of course, if the spot price of oil at delivery was $98 instead, you’d make $3 per barrel.
In fact, locking in oil contracts at a lower price helped save Southwestern Airlines millions of dollars when oil prices spiked and hurt all other major airlines.
Where to Find Oil Futures
When it comes to buying these instruments, there are two major exchanges on which they are sold: the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
NYMEX is a commodity futures exchange operated by CME Group based out of Chicago (although NYMEX is headquartered in New York with offices across the globe). NYMEX crude oil futures have a ticker symbol of CL, give the buyer control of 1,000 barrels of oil, and use the West Texas Intermediate (WTI) benchmark for oil. Oil contracts sold on NYMEX can be settled through physical delivery (the oil is delivered to a hub in Cushing, Oklahoma) or settled through cash, which is usually what happens.
The Intercontinental Exchange is an exchange headquartered in Atlanta, Georgia that deals in electronic transactions of futures and other commodities. Oil sold through ICE uses the Brent Crude benchmark. Contracts have a ticker symbol of B, control 1,000 barrels of oil, and are predominantly settled in cash – although there is an exchange for physical (EFP) option.
The main difference between ICE and NYMEX when it comes to oil is the difference in benchmarks used. West Texas Intermediate comes from the American Midwest and the Gulf Coast and is lighter and ‘sweeter’ (contains less sulfur) than virtually every other major benchmark. Brent Crude is a blend of oil that comes from the North Sea, off the coast of the United Kingdom.
Both exchanges have electronic access, so anyone who has a broker who has access to either exchange can buy and sell futures contracts. Most major online trading platforms have this access, but you do have to be approved. Brokers have the right to deny access to any investor or trader they deem too inexperienced or otherwise are ill-suited to trading futures (which can be very risky and very volatile).
Once you gain access, though, you have to post what is called a performance bond, which is an amount usually around 2-5% of the value of the contract. This is to ensure that you intend on fulfilling the contract and have the financial means to do so. Contracts have an initial margin and a maintenance margin. The former is to open the trade; the latter is to keep the contract active.
This is true for NYMEX and ICE. The margin varies and depends on the price of the contract. If you lose money on a trade, you will have to put in an equal amount of money into your account to maintain your maintenance margin, similar to having a margin account with stocks.
Trading oil futures can be exciting and very lucrative; just know, though, that oil is very sensitive and is quite volatile. Also keep in mind that oil is a truly global, fungible commodity, which means that events in one part of the world can and will impact oil prices everywhere. Learn as much as you can about oil market dynamics and be willing to take on risk in order to turn a profit before jumping into the futures market. If you are ready to start, I would recommend using Tradestation.