Trading Oil Futures: Basics on the Most Global Commodity of All

Crude oil futures are one of the most actively traded in the world. Understand the different ways an investor might participate in the crude oil market. oil barrels: trading crude oil futures
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Key Takeaways

  • Crude oil boasts the world’s most actively traded commodity futures, with prices driven by geopolitics, weather, and other factors

  • Traders might use oil futures to hedge a portfolio or capitalize on short-term moves in crude prices

  • Crude oil futures are different from energy stocks, and traders should understand market fundamentals and risks

Crude oil rules the commodities roost. Other commodities may be sweeter, shinier, or meatier, but nothing generates headlines and trading volume like oil.

Crude oil is the world’s most actively traded commodity, and it’s long been intertwined with geopolitics, the economy, weather, and other big-picture subjects. Through crude oil futures, traders can step into a global market that’s always moving. That also means oil futures can be volatile, swinging sharply up or down in response to difficult-to-predict events, such as storms, wars, and economic crises.

How does someone trade oil futures? Let’s count the ways and walk through a few basics.

Global Oil Benchmarks: WTI and Brent Crude

Futures contracts are standardized agreements between buyers and sellers: Both parties agree to buy or sell a specific amount of a particular commodity at a predetermined price at a specific date in the future.

The biggest oil futures markets, such as CME Group (CME), trade contracts based on West Texas Intermediate crude (WTI, the U.S. benchmark) or Brent crude (based on oil pumped out of the North Sea near Norway and the UK). One CME WTI crude oil futures contract (/CL, referring to “crude light”) specifies 1,000 barrels for delivery in Cushing, Oklahoma, a large storage hub near some of the biggest U.S. oil fields.

Brent crude’s primary exchange is the Intercontinental Exchange (ICE), but CME also lists a Brent contract (/BZ on the thinkorswim® platform).

The Crude Oil Menu: Light and Sweet, Heavy and Sour

Oil futures contracts may be standardized, but the commodity itself differs depending on where it originates. Crude that’s called “light” is relatively low-density oil and considered easier to refine into gasoline and other petroleum products versus a “heavy” oil. “Sweet” and “sour” refer to an oil grade’s sulfur content.

Crude with sulfur content below 0.5% is considered sweet (and easier to refine). WTI and Brent crude futures contracts are both based on light, sweet grades. Although WTI and Brent crude prices usually differ by a few dollars, the two grades are highly correlated and often rise or fall together. Still, supply disruptions or other fundamental developments may affect one grade more than the other, which can cause WTI and Brent prices to diverge.

What moves oil prices? As with commodities in general, supply and demand drive the bus. Oil traders closely follow weekly supply reports released separately by the American Petroleum Institute and the Energy Information Administration, the U.S. Department of Energy’s statistical arm. The reports often send oil prices higher or lower, depending on how close the supply figures were to trader expectations.

Top Oil Futures Players: Commercials and Speculators

There are two primary categories of oil futures market participants. One group, the hedgers, or “commercials”, is in the business of exploration, drilling, refining, shipping, or selling crude oil or refined products. Hedgers might include major oil and gas producers, independent refiners, or retail fuel chains that use futures to try to insulate themselves against adverse swings in oil prices or to lock in supplies.

Speculators, or “specs”, are the other primary category. Banks, hedge funds, and individuals who trade commodities for a living are considered oil market speculators, buying (going “long”) or selling (going “short”) depending on their expectations for the price of oil, natural gas, or refined products such as gasoline.

Futures Are Different from Stocks

Individual investors and traders can take oil-related positions in the shares of publicly traded exploration and production companies, drilling contractors, refiners, and others in the Energy sector. Energy company shares often follow the price of crude, though the correlation isn’t perfect.

For those considering a more active and potentially higher-risk approach, futures can present opportunities not always available in traditional investments. Oil futures and other commodity futures markets such as gold and soybeans are considered “alternative” investments, which sometimes behave differently from your typical stock or bond and offer diversification that could be valuable in a broad-based equity market slide.

By providing exposure to the commodity itself, rather than the companies that deal in it, oil futures could present opportunities to counter or capitalize on broader energy industry trends. For example, a qualified investor or trader could sell oil futures short, potentially capitalizing on a drop in crude prices, or go long and possibly capture gains on a short-term rally.

As another example, investors may hold shares of an exploration and production company they believe is a good long-term position but are concerned about a possible short-term price slump. They could take a short position in oil futures as a hedge—if the crude price tumbles and takes exploration company shares with it, that short position in oil futures could potentially be bought back at a profit. The chart in figure 1 shows the relationship between the S&P Oil & Gas Exploration & Production Select Industry Index ($SPSIOP) and crude oil futures (/CL).

FIGURE 1: STOCKS AND FUTURES. The S&P Oil & Gas Exploration & Production Select Industry Index ($SPSIOP, candlestick) and crude oil futures (/CL, purple line) generally move in the same direction, although there are times when one outperforms the other. Since April 2020, /CL has rebounded, while it took a little more time for $SPSIOP to move higher. Data source: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim platformFor illustrative purposes only. Past performance does not guarantee future results.

Understand How Margin Works in Oil Futures

Oil futures, like other commodity futures contracts, can be traded with margin, or borrowed money. Initial margin requirements vary by futures product and are typically a small percentage—2% to 12%—of the notional value of the contract. Anyone considering futures should understand the risks of margin trading, including margin calls.

For CME Group’s WTI crude futures, maintenance margin requirements as of May 24, 2022 were $8,750, or about 8% of the contracts’ overall value. (By contrast, with equity margin trading, an investor can only borrow up to 50% of the purchase price.) 

If a trader is looking for a “smaller-bite” position in the oil markets, CME lists an “e-mini” and a “micro” version of its WTI futures contract. The E-mini WTI futures contract (/QM) represents 500 barrels (half of the regular WTI contract), and the maintenance margin requirement was $4,375 as of May 24, 2022. The Micro WTI futures contract (/MCL) represents 100 barrels (1/10th the size of the regular WTI contract), and the maintenance requirement was $875 as of May 24, 2022.  

Regardless of how large a position is, remember that with more leverage comes more risk. Margin can magnify profits and losses, which means an investor or trader could lose much more than the initial amount deposited.

Oil Futures: The Bottom Line

Whether an investor or trader is seeking long or short exposure in the oil markets and whether it’s to hedge or to speculate, futures—along with options on futures—can be assets to consider in a trader’s tool kit.

Still, futures aren’t for everyone, and not all account owners or accounts will qualify. It’s a good idea to educate yourself about the oil markets and futures in general to make sure these instruments are a good fit for your risk tolerance and longer-term goals.

Trading on margin increases your level of market risk. Your downside financial risk is not limited to the amount of equity in your account. Charles Schwab Futures and Forex LLC (CSFF) may liquidate any or all of your positions at any time if your account equity drops below required margin levels. CSFF may increase its “house” maintenance margin requirements at any time and is not required to provide you with advance notice. You are not entitled to an extension of time on any type of margin call.


Key Takeaways

  • Crude oil boasts the world’s most actively traded commodity futures, with prices driven by geopolitics, weather, and other factors

  • Traders might use oil futures to hedge a portfolio or capitalize on short-term moves in crude prices

  • Crude oil futures are different from energy stocks, and traders should understand market fundamentals and risks

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