For traders, Crude oil not only offers high liquidity but also great opportunities to profit in almost any and every market condition due to its unique position in the global political and economic scenario. Market participants falter in taking the full advantages of fluctuations in Crude oil because of lack of knowledge of the hidden pitfalls and unique characteristics of Crude oil and its markets. Listed below are some tips on how to trade Crude oil futures to one’s benefit:
Understand its underlying characteristics: One needs to understand why and how Crude oil moves, which is essentially due to demand and supply. Flat production and rising demand encourage market participants to bid Crude on higher ground, while oversupply and shrinking demand encourage market participants to sell Crude lower. Tight convergence between negative elements can create downtrends, while that between positive elements can result in powerful uptrends.
Understand the market: Professional hedgers and traders largely dominate the crude oil futures markets. Hedgers speculate on short and long-term directions while professional traders take particular positions to offset physical exposure. Investors and retail traders, on the other hand, probably exert the least influence, which increases when Crude oil trends very sharply.
Select between WTI Crude and Brent: Crude oil trades via two major markets, Brent and Western Intermediate (WTI). While Brent comes from the North Atlantic, WTI surfaces from the US Permian Basin. Brent and WTI Crude contain different varieties of API gravity and sulfur content. Crude with lesser levels of WTI is colloquially known as Light sweet’ Crude. While WTI is traded more heavily in the world Crude oil futures markets today, Brent is considered as a better indicator of worldwide Crude pricing.
Read the long-term chart: If one assesses the long-term chart, WTI crude oil prices rose after WWII, peaking later in the decade before declining sharply. In 1999, Crude embarked on a new, powerful uptrend in 1999, peaking in July 2008, before dropping and leveling in 2015.
Picking the right venue: Picking the right venue to trade in Crude oil futures is also essential. For instance, the WTI Light Sweet Crude Oil futures contract on the NYMEX offers superb liquidity but high risk, trading more than 10-million contracts/month. NYMEX also offers many other energy-based products. Another instance is the US Oil Fund, the most popular way to trade Crude via stocks, which tracks WTI futures. Sector funds and oil companies offer diverse and varied industry exposure by tracking general Crude trends. The five biggest oil company funds in the US are VanEck Vectors Oil Services ETF, iShares US Oil & Gas Exploration & Production ETF, and United States Oil Fund LP.