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Trading Crude Oil Futures

As we saw on the previous page there are essentially two ways you to trade in crude oil trading. The first is using the centralised trading oil exchange ( NYMEX trading), where trading contract sizes are fixed and generally designed for the larger oil trader, and then there are the OTC trades increasingly offered by oil brokers, which are generally smaller and more competitive, and offer a way for the retail investor or speculator to enter the oil trading markets. Both approaches of course have their advantages and disadvantages, so let’s look at each of these in turn, and start by looking at the oil futures contracts typically traded on the major oil trading exchanges.

For the purposes of explanation I’m just going to concentrate on the NYMEX and ICE futures market, and take the Brent Crude futures oil contract as an example.

Let’s start first with contract size (or lot size) – this tends to be standardized across the exchanges such that one lot equals 1000 barrels. All prices are quoted in US dollars and cents, so if we take a barrel of crude oil at $100, this makes the value of one oil futures contract or lot as $100,000. The minimum price movement is quoted as $0.01 per barrel ( equivalent to a tick value of $10),  and there are no limits on daily price fluctuations. All the futures contracts are quoted monthly, with ICE listing a maximum of 72 months, and NYMEX quoting the current year plus a further 96 months. All open oil trading contracts are  settled on a daily basis and marked to the market by the oil trading exchange. In effect what happens is that any loss or gain in your positions is settled in cash in your account. The ICE oil futures contracts expire on the business day immediately preceding the 15th day prior to the first day of the delivery month, and the NYMEX contracts expire a day earlier. Finally one important point to note is that the ICE contract is a deliverable contract, whilst the NYMEX contract is financial settlement only, so you have been warned!

Now one of the most important issues is that of margin and the requirements of each exchange – based on one contract NYMEX require a minimum margin of $9,450 and ICE require a minimum of $13,000. So what does all this mean for us as oil traders, and online oil trading. Well in simple terms in order to trade one oil contract we will need a minimum of anywhere between 9.5% and 13% in margin just to open one trade, and a significant move against us could result in a rapid performance bond call from the future oil trading exchange ( similar to a margin call in the forex market). In addition to the high initial margin requirements, you will also have the additional costs of brokerage and clearing fees. So clearly in order to trade oil we will need some deep pockets, even before we start, and the question I am often asked is ” is there an alternative?” – the answer thankfully is yes!

In complete contrast to the above, OTC ( over the counter) contracts in my view provide the ideal alternative to getting started in trading oil, for the simple reason that they provide all the same trading opportunities, but at a fraction of the cost. The products I know from personal experience are those that are offered by several of the well established oil brokers, which offer all the advantages and none of the disadvantages of an exchange traded contract. To all intents and purposes they are identical in virtually every respect with both Brent Crude and WTI Light Sweet Crude contracts available, and just to clarify, OTC simply means a bespoke contract offered by an oil broker, rather than an exchange traded contract bough and sold on the exchange.

The “entry level” products are generally a mini rolling spot contract which is 1/10th the size of a standard lot – in other words the contract is only 100 barrels  futures contract is now only $10,000 ( at $100 per barrel), a tenth the size, and as a result margin requirements are significantly reduced with oil broker ODL setting a standard 1% for all OTC oil contracts. Tick size is also reduced accordingly to $1. So to trade this contract the initial margin would only be $100 – who said online oil trading was expensive! Now as well as offering an excellent opportunity for both novice and experienced traders alike to trade in small contracts sizes, in addition there are no brokerage fees or commissions, and spreads are fixed at 5 cents, so you always know what the spread of the oil trading contract will be, irrespective of market conditions.

Now one area that always seems to cause confusion, particularly when trading OTC mini contracts is rollover. Whilst I have explained this on the futures trading site in some detail, it does work slightly differently with the above products so let’s take a look at it now, so that you have the complete picture before opening your account with your oil broker and start crude oil trading.