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Crude Oil Futures

Energy prices are crucial for all people, and the plunge in crude oil prices has important changes in the value of certain key commodities for consumers and investors.

But, on the side of investors, there is a lot more to consider than the oil price today. Crude oil futures give you the opportunity to profit from fluctuations in the barrel price, but they operate a lot more differently than merely buying oil and gas company stocks

What are Oil Futures Investing?

Crude oil futures are futures contracts in which buyers and sellers of oil coordinate and agree to deliver particular amounts of physical crude oil on a given date in the future. 

Oil Futures Explained

An oil futures contract is the agreement to buy and sell a particular amount of barrels of oil at a predetermined rate on a pre-decided date. When futures are bought, a contract is signed with the buyer and the seller and secured with a margin payment that covers a per cent of the total value of that contract.

End-users of oil purchase on the futures market in order to lock a price; investors buy the futures as a gamble on what the price would actually be in the future. They profit if what they had guessed was right. Typically, they would liquidate or roll over their futures holdings before they would have to take the delivery. 

There are two major oil contracts that are watched by the oil market participants. North America's benchmark for oil futures is West Texas Intermediate crude, which trades on the New York Mercantile Exchange. In Europe, Africa, and the Middle East - the benchmark is the North Sea Brent Crude that trades on the Intercontinental Exchange.

Since there are multiple futures contracts open at once, most of the trading revolves around the front-month contract. For this very reason, it is known to be the most active contract.

How Does an Oil Futures Contract Work?

Oil futures contracts are simple; they continue the time-honoured practices of particular participants in the market selling risk to the others that gladly buy it in the hopes of making money. The buyers and sellers establish a price that oil will trade at not today - but on some coming date. While no one is aware of what price oil will be trading at nine months from now, players in the future market believe they could.

Unlike agricultural commodities, futures for oil settle monthly. Other futures contracts would settle only four times a year. The regular frequency of oil futures makes it simpler for the investors to understand trends or expected trends - in the eventual price of oil. 

Benefits of Investing in Oil Futures

There are various reasons why you need to invest in oil futures, and here are some of the benefits that you can look forward to:

  • Oil prices fluctuate a lot, and though this adds to the level of difficulty when trading, it will also add to the level of potential profitability. It will give you the opportunity of winning trades and yield eye-opening returns.
  • The world is moving away from burning fossil fuels, but that does not mean it has happened yet. Oil is still one of the most in-demand commodities in the world. This means that if there is a seller for oil, there is always a buyer for it. When trading oil futures, there would be no shortage of liquidity when it is time to exit the position; you will never be stuck holding onto the worthless paper.
  • Crude oil could be traded utilizing margin accounts with cash holding needs as low as 5%. It means with just 5,000, you would be able to buy 1,00,000 in oil futures contracts, which helps to further increase the potential profitability.
  • The future environment is relatively straightforward, with fewer moving parts to consider than the stock market. With a little research, you can understand the ins and outs, which will help you develop a strategy that assists you in meeting your investing goals.
  • The biggest draw to oil is the idea that the prices would have to go up with time. As the worldwide demand for energy, plastics, and other petroleum products continues to surge, so will the demand, too will. This will limit the supply. Oil is from carbon in ancient organic matter that has been buried under heat and pressure for millions of years, which means it is not made in the lab. The law of supply and demand suggests that the value of oil needs to continue to head upward over time.

How to Buy and Sell Oil Futures?

There are certain ways to buy crude oil futures, and some of the most common ones are:

  • Buying Oil Futures Directly - The first option is to buy and sell oil futures directly with the commodities exchange. Or on the other hand, you can also purchase it through a registered broker. But buying futures is not the same as trading a stock, and you will be required to have a specialized account with a brokerage that gives futures trading. Every broker sets the standard for when you need to open a futures trading account. Once you have access to the futures trading market, you will be able to place trading orders in a similar way to stocks and ETFs.
  • Buy and Sell ETFs - If you prefer someone else to take control of the buying and selling of oil futures while paying minimal fees, you could invest in oil-related ETFs.

 

Crude Oil Futures - FAQs

How can I buy Oil futures?

Trading futures is not like trading stocks, and you will need a special account with a brokerage that provides you with futures trading assistance. Every broker sets the standard for when you need to open a futures trading account, but you could expect to need a few thousand of starting capital. Once you have access to that futures trading market, you could place a trading order like you want, similar to stocks.

What will it take to become a successful oil futures trader?

Successful oil traders share traits with successful active traders in all the markets. They would need the discipline to develop, text, and stick to a good strategy. They need the patience to wait for the trades to come to them. They need to be adaptable and forward-thinking to update strategies as markets change. They need mental toughness to withstand losing streaks and independence to avoid relying on specific services or mentors.

What do oil futures barchart, spot, and futures crude oil prices tell the investor?

The basis or distinction between oil futures contracts and the spot market can be indicative of the near-term expectations of oil demand and supply. When the futures prices are trading higher than the spot, it says that the traders would be willing to pay a premium for oil to be delivered at a future date and that the expectations are bullish. If instead, futures are trading below the spot, it could be a bearish signal.

How can I follow the crude oil industry?

Crude oil rates and related market news are available online; often, they are available for free. 

Are oil futures a great investment?

Oil futures are known to be one of the most frequently traded derivatives on the market, and it is a great investment. You could thrive on oil futures, high-volume trades, leverage options, and the fact that it is relatively simple to get started.

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