The crude oil market is a global market that changes with investor sentiment on a daily basis. While the long-term movements of crude oil futures prices are generally driven by fundamental factors such as economic growth, short-term movements occurs as investors digest new information. Investors who trade the crude oil futures market can benefit from basic trading strategies that include fundamental analysis, technical analysis and spread trading.
Crude Oil Futures
Crude oil futures are contracts between a buyer and a seller that reflect the future price of crude oil at a specific location that is physically delivered on a certain date in the future. For example, the West Texas Intermediate -- WTI -- crude oil futures contract, which is traded on the Chicago Mercantile Exchange, is delivered in Cushing, Oklahoma. WTI is the most liquid crude oil futures contract, but there are others, such as the Intercontinental Exchange’s Brent futures contract, which is also liquid and provides access to a European grade of crude oil. Some of the futures contracts don't provide physically delivered crude oil at settlement and instead exchange cash between buyers and sellers based on profits or losses.
Crude oil futures prices can be volatile and often change when new information is digested by market participants. One trading strategy that can be used to trade crude oil futures is to initiate a position after the government releases its weekly estimate of petroleum inventories. Every Wednesday, the Department of Energy releases its estimate of crude oil imports, inventory and demand at 10:30 a.m. EST. When the new information is released, traders can predict the future direction of crude oil futures based on whether the data exceeds or misses prior estimates based on analysts’ expectations. Analysts' estimates are generally reported by Bloomberg, Reuters and The Wall Street Journal.
Technical analysis is the study of historical prices and is used by investors to find price patterns that might potentially repeat themselves in the future. Enabling traders to estimate future price changes, it can assist in creating both short- and long-term trading strategies. Analyzing support and resistance levels is a popular methodology used to gauge future crude oil price movements. Support is a price level at which crude futures are buoyed from buyer demand, where resistance is a level at which prices are capped by seller supply. When prices accelerate through support or resistance, they tend to form a trend.
Spread-trading crude oil futures is a style of trading that attempts to profit from changes in the spread between one crude oil futures contract and another. Calendar spread trading is the purchase or sale of a short-term futures contract with the simultaneous sale or purchase of a longer-dated crude futures contract. Another type of crude futures spread trade is the purchase of one type of contract, such as WTl, and the simultaneous sales of another type, such as Brent.
David Becker is a finance writer and consultant in Great Neck, N.Y. With more than 20 years of experience in trading, he runs a consulting business that focuses on energy hedging and capital market analysis. Becker holds a B.A. in economics.