How To Trade Oil Futures – The Basics

Crude oil (CL) is one of the more active commodities to trade. It has tremendous volatility and excellent liquidity. Oil is affected by global economic and political conditions, almost to the same extent as US Treasuries. The price of crude oil affects the price of many other assets, including stocks, bonds, currencies and even other commodities. This is because crude oil remains a major source of energy for the world and is a defect currency in many ways.

Crude Oil Contract Specifications:

• Ticker Symbol: CL
• Exchange: NYMEX
• Trading Hours: 9:00 AM – 2:30 PM EST.
• Contract Size: 1,000 U.S. barrels (42,000 gallons).
• Contract Months: all months (Jan. – Dec.)
• Price Quote: price per barrel. Ex $65.50 per barrel
• Tick Size: $0.01 (1¢) per barrel ($10.00 per tick).
• Last Trading Day: 3rd business day prior to the 25th calendar day of the month preceding the delivery month.

Cude Oil Fundamentals

• Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). “Light Sweet” is the most popular grade of crude oil that is traded.
• Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and many other petrochemicals.
• Russia, Saudi Arabia, and the United States are the world’s three largest oil producers.
• When crude oil is refined, or processed, it takes about 3 barrels of oil to produce 1.5 barrels of unleaded gas (RB) and 1 barrel of heating oil (HO).​

Crude Oil Reports

• The main reports for crude oil are the EIA Weekly Petroleum Status Report.

This report is released every Wednesday at 10:30 PM EST, unless there’s a holiday, then it’s released on Thursday at 11 AM EST. The report is usually considered bullish if the actual reported inventory is significantly lower than the expected inventory level, and bearish if it is higher. We say usually because there may be other factors that could affect how the market perceives the report, such as seasonal conditions, or storage anomalies.

TIP: On the days of the report, if you are a day trader or scalper, my experience says don’t trade Crude Oil between 8:50 Am and 10:35 AM EST. The market is erratic on report days during these hours. Wait until the report has had a chance to settle and the market digests its content before trading.

Price Movements

The price of crude oil (CL) is highly correlated to the economics of gasoline (RB) and heating oil (HO). In fact, all three of these contracts are often traded together either for hedging by refiners, or speculation by professional traders in what is called the Crack Spread.

The Crude Oil market is by and large a trending market. There is a high level of volatility however, which can cause price to jump or plummet. These spikes are typically followed by a regression back to the mean direction, unless the event results in a major supply disruption. Crude often gets stuck in prolonged ranges after a big move, identifying these ranges is crucial to exploiting excellent trading opportunities.

The U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices. A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tends to support higher oil prices. However, if oil prices move to high, it can stifle the economy. At this point, oil prices tend to move opposite the stock market. This usually becomes a concern when oil moves above $100. In the past, prices in the $120-130 range bring about capitulation.

Profit Targets for Day Traders

When day trading Crude Oil futures set your profit target between 0.15 to 0.20 cents. This seems to be in line with the intraday swings for the CL contract.

A Target of 0.15 cents with a single full-sized contract translates to $150 ($10/tick or 0.01) and 0.20 cents equals $200, so that’s plenty of profit potential but it’s not going to make outsized demands on your trading strategy like if you were shooting for a lot more, like 0.40 or 0.50 cents. I’m not trying to tell you there aren’t bigger moves, in fact I’ve seen plenty of times rallies go well beyond $1.00 or more. I’m just trying to give you a target that can make profits consistently.

Day Trading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts well to pivot points and support and resistance levels. You have to make sure to use stops in this market, as it can make very swift moves at any given time. It is best to day trade within the context of a larger global macro strategy, rather than rely on pure technicals.

There is no shortage of trading opportunities in crude oil from day to day. The market is very active and it has plenty of volume. Crude oil is a 24 hour market, so be cautious of possible overnight moves that can take you by surprise. Much of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the e-mini S&P, you will probably like crude oil too.

Crack Spread Trading

In my opinion, day trading technicals is too risky, but many traders find it okay. I prefer to trade a spread, like one of the Crack spreads. My favorite is Crude (CL) vs. Heating Oil (HO) in a 1×1 spread, because of the very high correlation between the two products (r = 0.90 on a daily basis). This provides a level of risk aversion because it’s essentially a hedged trade. The primary trading methodology is mean reversion.

There are other popular Crack Spreads, such as Crude (CL) vs Gasoline (RB), and an all inclusive trade with Crude, Heating Oil and Gasoline, which is usually traded in the ratio of 3x2x1, but this is typically the type of trade a refiner would do to hedge their business

I trade Crude vs Heating Oil, and offer a course and mentorship program for this spread. If you are interested in learning to trade the Crack Spread, contact me at 508-446-0517. And look out for future posts on the Crack Spread.