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How to Day Trade Crude Oil Futures and CFDs

crude oil trading, commodity trading

Crude oil is one of the most vital energy sources used globally and is a highly traded commodity.  It can be traded physically or for the purpose of speculating on the price of crude oil and making profits from short-term movements. 

If you consider crude oil as your primary day trading asset, you need to understand the basics of the ‘black gold’ commodity. In this guide, we’ll help you find out if crude oil is the best asset for you to day trade, what are the factors that impact crude oil prices, the methods in which you can trade crude oil, and more. 

Key Points to Take Away

  • WTI crude oil is the most popular and traded commodity in the world with nearly 1.2 million contracts traded on a daily basis
  • There are different ways to day trade crude oil. These include futures contracts, CFDs, ETFs, and options.
  • When trading oil futures, there are several factors and important reports that impact crude oil prices
  • Some of the tools that can be used to day trade crude oil futures include crude oil vs natural gas spread, trading the fundamentals, and understanding contango and backwardation

Is Crude Oil Good for Day Trading?

The short answer – absolutely, crude oil is a great asset for day trading. It’s an extremely popular commodity due to the fact that it offers high liquidity and market volatility. Further, there are various factors that impact crude oil price –  including geopolitical factors, seasonal demand, storage costs, etc – which make crude oil among the most interesting financial assets to trade. 

On the other hand, you need to take into account that the volatility of crude oil prices can work against you. It all depends on the type of trader you are and the type of trader you want to become. Typically, crude oil prices are moving fast in heavy trading and in large amounts. It is, therefore, a favorable commodity for aggressive traders that look for wide price swings rather than stable and ranging markets

Fun Fact

OPEC member countries control under 80% of the total crude oil reserves around the world

All the Ways to Day Trade Crude Oil

Much like any other financial instrument, there are various ways in which you can get access to crude oil day trading. Every way has its own pros and cons so you better investigate each method before you start day trading crude oil. 

Crude Oil Futures

The first and most conventional way to trade crude oil is via futures trading. In essence, crude oil futures are financial contracts between buyers and sellers to buy and sell the specified commodity at a certain price and date. 

There are different hubs for crude oil futures contracts with the most popular of all that is also used as the benchmark price for oil prices is the NYMEX West Texas Intermediate (WTI) Crude Oil futures. In 2008, the New York Mercantile Exchange (NYMEX) was acquired by CME Group, so the contracts are available on the Chicago Mercantile Exchange

The main attractions of trading crude oil futures contracts via the CME are the ability to buy and sell futures contracts with different expiration dates. As a matter of fact, many day traders use this as a trading strategy and trade the spread between futures rather than buying or selling an individual contract.

crude oil futures, commodity trading

Another major benefit of trading a crude oil futures contract is the use of the level 2 order book. This allows traders to view all the buyers and sellers and quantities of each crude oil futures trade.  Therefore, they can get a sense of the sentiment in the market and have information related to the specified market. 

Crude Oil CFDs (Contract for Difference)

Needless to say, there are lots of advantages to trading crude oil futures on a commodity exchange. The level 2 order book, the rebates, tight buy and sell spread, etc. But, trading crude oil futures is not necessarily the best option for every trader. 

First, it requires a high initial investment of somewhere around $5000-$10000 (although some brokers will allow you to open a futures trading account with $1000). Secondly, you need to expect a long and complicated registration and verification process. After all, crude oil is a physical commodity, which means that in some futures contracts, you ensure you’ll deliver the commodity at a predefined location and at a certain date. 

So, another way to get access to trading crude oil futures prices is through CFDs. These are basically derivative contracts of the NYMEX futures contract that enables traders to simply speculate on crude oil prices without physically holding and having to deliver the commodity. For that reason, CFD brokers require a low initial investment, provide leverage of up to 50:1 and give users access to free top-notch trading platforms and tools. 

Here, at Switch Markets, we offer crude oil futures trading via CFDs with a leverage ratio of 50:1, no fixed fees, and access to the popular MetaTrader 4.   

Crude Oil ETFs (Exchange Traded Funds)

Another way to speculate on crude oil prices is via Exchange Traded Funds (ETFs). These crude oil ETFs are essentially a basket of top oil companies around the world that make their income from distributing and selling various petroleum products. For that purpose, you’ll have to open an account with a brokerage firm that gives you direct access to stock exchanges (although many CFD brokers also provide Exchange Traded Fund trading). 

Nonetheless, here are the 5 most popular crude oil ETFs as of 2022:

FYI

The global supply of crude oil is expected to meet the world’s demand for at least the next 25 years

How to Day Trade Crude Oil?

Trading crude oil is no different than any other instrument. You’ll have to develop a trading strategy and master your fundamental and technical analysis skills. 

But before (and after) you develop a trading technique and learn how to use a trading platform – here is the information you must know when day trading crude oil futures. 

Factors that Affect Crude Oil Prices

There are several different factors that have a direct impact on crude oil prices. These include:

  • Seasonal demand
  • Economic growth and recession
  • Geopolitical events –  conflicts, wars, etc
  • Disruption in oil transportation
  • Increase or decrease in oil output by top oil-producing countries
  • Green energy technology improvement
  • Price movements in other petroleum products – natural gas, heating oil, Brent crude oil, gasoline, etc

Major Oil Companies to Follow

Even though the oil industry has been hit by the Covid-19 pandemic, it is still considered by many as the most profitable industry of all and the backbone of the global economy. Furthermore, there are signs of a recovery of the oil industry as the demand for oil is rising following the mini-crisis in 2020.  

Therefore, as a crude oil trader, you’ll not only have to follow the energy industry but also need to keep your eyes open and follow major oil and petroleum-related stocks. These companies include

Crude Oil: Key Data to Watch

Below, you can find some of the most important reports you need to watch when trading crude oil:

For more information, check our guide – How to Trade Natural Gas: Key Data to Watch

Fun Fact

As of early 2022, Saudi Aramco is the 3rd largest private company in the world in terms of market capitalization with a valuation of nearly $2 trillion. 

Tips and Trading Strategies for Day Trading Crude Oil

Professional oil traders need a trading strategy and a better understanding of the oil market. Remember, the oil market is quite complicated and you must increase your knowledge about the politics of the oil markets. To do so, you can read about the Petrodollar system between the United States and Saudi Arabia, the Russia-China oil and natural gas deal, etc. 

With that in mind, below are some tips and tools that you can use and integrate into your trading strategy:

Know and Trade the Fundamentals

Crude oil is primarily influenced by fundamental factors such as geopolitical events, weather, economic growth, etc. This means that if you are planning to day trade crude oil, you need to follow the news and trade the fundamentals. 

You can follow oil and gas websites, the EIA official website, Twitter (#crude oil, #WTI, #oilprice), etc. All for the purpose of knowing exactly what is going on in the oil market at any given time. 

Crude oil vs Natural Gas Spread

As an inter commodity spread, it is not surprising that there’s a strong correlation between crude oil and natural gas. Much like the gold to silver ratio – crude oil vs natural gas spread can be used as an indicator to buy or sell one of the assets, especially for intraday trading. In many cases, you’ll notice one of the commodities is moving before the other, which will help you find lots of trading opportunities. 

crude oil vs natural gas, trading chart

Crude oil vs Natural Gas Chart

Understanding Contango and Backwardation

In 2020, the price of a barrel of WTI crude – perhaps the most important benchmark price crude oil – fell below zero for the first time in history to a level of minus $37.63 per barrel. How is it possible? Well, basically the storage of crude oil is a factor that must be taken into consideration. At that time, when the coronavirus pandemic emerged and the lockdowns were implemented, no one wanted to buy oil products and sellers were willing to pay in order to get rid of the high crude oil storage cost. 

That is known as contango – a situation in which the future price of crude oil (or any commodity) is higher than the spot price. On the other hand, backwardation occurs when crude oil spot prices and the price of front-month futures exceed the price of futures contracts.  Usually, the crude oil market is in backwardation because there’s a constant demand for oil products. However, you must learn the concept of contango and backwardation and understand the huge impact storage costs have on oil prices. 

contango and backwardation, commodity trading

Source: Wikipedia

Day Trading Crude Oil Futures vs Forex

Beginner traders usually contemplate on what asset or market to focus on – crude oil (commodities) or forex. Clearly, there are a lot of opinions on both sides and you’ll most likely have to try each market before you make a decision. 

To start with, here are the main factors you need to consider:

Leverage: In the FX market, the leverage ratio can reach up to 500:1 while crude oil comes with a lower leverage ratio of up to 10:1 on futures exchanges and 30:1 with CFDs (Some CFD brokers like Switch Markets offer a higher leverage ratio of 50:1 for commodity trading). 

Volatility: Make no mistake, the forex market is volatile but is not as volatile as the crude oil market. However, bear in mind that volatility can work for you as well as against you so you need to develop your trading strategy and trading style before you choose the asset you want to trade on. 

Diversity: The good thing with the FX market is that you have a wide selection of currency pairs to trade on. The crude oil market, on the other hand, enables you to focus on one product only (unless you trade futures contracts with different expiration dates). That is, for some people, very monotonic. 

The bottom line – the volatility of crude oil can be certainly risky, especially for beginner traders. Having said that, it’s all up to you to decide. Traders who love fast-moving markets will prefer trading the crude oil markets while those who prefer diversity will choose the FX market. Our tip – Try both on a demo account and then decide. 

Fun Fact

According to researchers, oil has been used in different societies since the 3rd century BC

Final Thoughts

All in all, crude oil is certainly a good choice if you want to get involved in day trading. Oil is a liquid and volatile commodity and there are plenty of factors and market news announcements that affect crude oil prices. It is an exciting market to get into with different angles and interpretations. If you feel that you have an aggressive trading nature, crude oil could be the asset of choice for you. 

In this case, all that is left is to choose the best way of trading crude oil. Taking aside ETFs – the best choices for you are crude oil futures contracts or CFDs. If opting for the second option, Switch Markets enables you to trade crude oil with a leverage ratio of 50:1 on the MetaTrader4. But if you still have doubts, you can get access to a demo practice account before risking real money and see how the crude oil market works in real-time.  

FAQs

What’s the difference between WTI crude oil and Brent crude oil?

Brent and WTI Crude oil are the two main benchmarks for oil prices, located in different areas in the world. While Brent crude oil, traded on ICE exchange, is considered an international benchmark, West Texas Intermediate (WTI) is a US light sweet crude oil benchmark that trades on the CME exchange. 

Is oil traded 24 hours a day?

Well, basically yes. But not 24 hours. Only 23 hours a day. This is because the CME crude oil futures markets are open 5 days a week from 6:00 pm US until 5:00 pm ET. 

What’s the best way to start trading crude oil futures?

This largely depends on your goals as a trader and the budget you have to start your day trading journey. To be honest, if you are planning to become a professional crude oil day trader – then the best option is to invest a large sum of money (at least $15K-$25k) and open a futures trading account. Otherwise, the best way for you would be to open a CFD trading account – The deposit requirement is low, you get a high leverage ratio, there are no fixed trading costs (only spreads), and the tick value is not as high as trading crude oil futures contracts ($10 per tick for the standard futures contract, and $12.5 per tick for the mini crude oil futures ).  

How to trade crude oil on MT4?

To trade crude oil and other commodities on the popular MetaTrader4, you need to find a CFD broker that offers users the MT4. Switch Markets, for example, offers traders to open a trading account and get access to crude oil trading via the MT4 with a leverage ratio of up to 50:1.

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