Frequently referred to as the “wild west” of the financial markets, oil futures trading has a reputation for being an incredibly volatile endeavor. Far from securities like the Dow 30 or S&P 500, crude oil is one venue where the risk is almost always on.
Of course, there is risk and then there is RISK. For some, the periodically extreme pricing fluctuations of West Texas Intermediate (WTI) or North Sea Brent (Brent) crude oil suggest pending disaster. To others, the wide daily ranges and consistent price action represent opportunity in its purest form. If you’re hungry for a market that brings lightning-fast breakouts, strong trends, and regular volatility, then oil futures trading may be just your game.
Volatility + Leverage = Large Profits
Oil futures trading is a discipline that combines robust pricing volatility with extensive assumed leverage to generate extraordinary profits. However, in order to do this successfully, it helps to understand why oil prices are inherently volatile and how leverage is applied.
Several key market drivers affect global oil values. These factors can send prices tumbling or spiking, depending on how energy traders and investors interpret them. Here are a few categories of these important underpinnings of the oil market:
- geopolitics
- industry reports
- armed conflicts
- economic cycles
- seasonal pricing trends
From release of the weekly Energy Information Administration (EIA) crude oil stocks report to an unexpected act of terror, any of these market drivers is capable of sending oil prices reeling. Due to this fact, the second part of the equation, leverage, is critical. Apply too much and an unfortunate swing in price can quickly drain your trading account, but if you apply too little then a great opportunity is lost forever.
To illustrate this point, let’s examine how leverage works for the WTI crude oil contract available on the Chicago Mercantile Exchange (CME):
- Contract size: 1000 barrels
- Price quote: U.S. dollar and cents per barrel
- Minimum tick size: $.01 per barrel, $10 per tick
- Intraday margins: Typically $1000 per contract; may vary according to market conditions and broker.
- Maintenance margins: Holding a position through each day’s electronic close requires a minimum account balance of $3400 per contract.
Any trades are educational examples only. They do not include commissions and fees.
After looking at the contract specs for WTI crude, you can see that taking a substantial intraday position may be done with as little as $2500. In fact, many oil futures trading strategies do just that in an attempt to secure fast profits. Take the following hypothetical scenario for Hayden the retail energy scalper:
- During pre-session preparation, Hayden estimates that North American fracking output is likely up due to friendly weather and the high oil prices of summer. Accordingly, Hayden believes that a surprise supply glut may be alluded to in the weekly EIA crude oil stocks report. The EIA report is due out in a few hours at 10:30 AM EST.
- Hayden pours over price charts and notes that August WTI crude oil is pushing intraday and yearly highs at $74.86 per barrel. It is now 10:28 AM EST.
- Hayden places a sell stop-market multi-bracket order for two contracts of August WTI at $74.74. Tight 1:1 and 1:2 risk vs. reward management parameters are implemented, using profit targets of 10 and 20 ticks with a stop loss of 10 ticks.
- The clock chimes 10:30 AM EST. The EIA reports a supply build of 4 million barrels, well in excess of consensus estimates. August WTI instantly crashes to $74.48 before finding any bids.
- Hayden’s sell stop market orders are filled at $74.69 due to slippage, but still manage to secure both the 10 and 20 tick profit goals. The cash register rings and a lightning-fast $300 is credited to the account.
To many traders and investors, the above scenario may seem to be a pipe dream. Price could have just as easily run Hayden’s stops, right? Absolutely. But, given an adequate definition of risk and a positive expectation on the trade setup itself, oil futures trading strategies such as these may be extremely profitable.
Oil Futures Trading Isn’t Just for ExxonMobil
If you’re interested in becoming involved in global oil, a consultation with an industry pro at StoneX is a solid first step. However, there’s no substitute for observing the live action of these exciting markets.
