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How is Crude Oil traded?

The mechanics of a trade are virtually identical to those in other markets.

Example: the $/BL rate represents the price of 1 barrel of crude oil in US dollars. If you think the Crude oil price is set to rise, you will buy crude oil. If the crude oil price rises, you sell the crude oil back, and you cash in your profit. Please keep in mind that Forex trading involves a high risk of loss.

What you should know about trading?


You may have noticed that the newspaper reports and government comments on ‘soaring fuel prices’. What most people don't realize is that there is a tradable crude oil market - where you can potentially profit from the movement of these prices.

The margin required to trade crude futures, fluctuates between $4,000 and $8,000. Therefore, traders can expose themselves to the price fluctuations of a contract valued at approximately $70,000 with less than 10% down. It is easy to see how quickly gains and losses can add up with this type of leverage.

With that said, although the exchanges set the required minimum margin it is the trader who ultimately controls the amount of leverage used. Those not wishing to use leverage, and the available capital, can effectively eliminate it by depositing the full value of each contract traded.

The minimum tick in crude is one penny, and equates to a profit or loss of $10 to a trader. Accordingly, a dollar in price move in the underlying results in a profit or loss of $1,000 per contract. For instance, a trader that bought crude oil at $62.00 and sold at $63.00 would have walked away from the trade a winner in the amount of $1,000 minus commissions and fees.

How Crude Oil futures Works


Crude Oil Futures trade in units of 1,000 U.S. barrels (42,000 gallons). It is always quoted as $ per barrel. Like most of the things you buy, oil prices are affected by supply and demand. More demand, like the summer driving season, drives higher prices. There is usually less demand in the winter, since only the Northeast U.S. uses heating oil. Geopolitical tensions in the oil producing regions, natural disasters affecting oil production and refining areas affects oil prices as it affects oil supplies.

Example of a Crude Oil futures Trade:


Quite simply, a trader long or short a single futures contract will make or lose money based on the value of 1,000 barrels. With crude oil worth $70 per barrel, the total value of a single futures contract is $70,000 ($70 x 1,000 barrels).

If you purchase 1 contract of CL at $70 and the next day it moves to $72, you have a profit of $2,000. Inversely, if the price dropped to $68 the next day, you would have a loss of $2,000.

Important: be aware of the risks


Crude oil is among the most notorious commodity markets but is also among the most treacherous. Nonetheless, speculators are drawn toward the leverage and volatility provided in this trading arena...and the stories of riches made and lost by its participants.

Do not trade crude oil futures unless you are financially and emotionally stable enough to weather the extreme volatility of this market. Losing position get out of control pretty fast and losses mount very quickly in this market.

If you are long, your theoretical losses are limited to the total value of the contract if the price of oil dropped to zero. If you are short, your theoretical losses are UNLIMITED.

Crude Oil Future Contract