A look at Trading Oil Futures
Trading oil futures has grown massively amongst the smaller traders in recent years. It is a very exciting market to trade as there is always the potential for extreme volatility.
There are many factors that influence the price of oil including:
- The current supply in relation to demand.
- The weather - This can have a big effect on demand.
- Natural disasters that threaten supply - Remember what happened to oil during hurricane Katrina?
- Geopolitical tensions with the large oil producing countries.
Oil price chart
Unlike many other futures contracts, oil futures contracts are available up to 8 years in advance. These can be ideal for a long term speculative view.
Historically, oil contracts have been in periods of backwardation and contango. Backwardation is where further contracts are priced lower than near contracts. Contango is the opposite, further contracts are cheaper than near months.
The contracts with the most distant expiry are typically very illiquid. This can result in wide spreads, possibly extremely large.
The two most commonly traded forms of crude oil are West Texas Intermediate (WTI) and Brent Crude Oil.
West Texas Intermediate is lighter than Brent crude. Historically the prices of both WTI and Brent crude oil have been very closely correlated.
Standard Crude oil contracts are valued at 1000 barrels of oil. For example if the price of WTI crude oil was $90 per barrel, the contract would be worth $90,000. This is 1000 multiplied by $90. For this contract each cent movement is worth $10. This can be applied to be both. 
The size of these contracts may be too high for small or new traders. There are mini oil future contracts that are half the size of the standard contracts.
Let's take a look at an example of a long term speculative view with trading oil futures:
Let's say the contract five years in the future is priced at $90. Rita wants to take a long term bullish five year view on oil. She decides to buy 1 standard contract. The margin requirement for the contract is $9,000 and the maintenance margin requirement is $6,825.
In five years time if Rita is correct and oil is currently priced at $160 per barrel. Her contract will be up $70,000. Remember, each one cent movement is worth $10.
However, if Rita is wrong and oil drops to $50 per barrel, her contract will be -$40,000. She will have to pay this amount to her broker, even though it exceeds her initial margin requirement. She would also have to pay money to her broker before the contract expires to keep the position open, so she could comply with the $6,825 margin requirement.
In conclusion, If you want to invest in oil, trading oil futures are an excellent way to speculate on oil price movements in the short, medium or long term. However, the example above highlights how risky they can be! On many occasions the distant contracts have been cheaper than the near contracts.
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