Popular Commodity for Traders: Crude Oil
Oil Industry Overview
The Oil industry is one of the largest industries in the world estimated to be worth over 1.36 trillion dollars in 2016. The Organization of the Petroleum Exporting Countries, more commonly known as OPEC is made up of 13 countries and represent a large portion of the oil industry, exporting over 338 billion dollars of oil in 2016. The demand for crude oil is unlikely to end as it is an essential raw material for over 6,000 products we use every day including petrol, plastics, fertilisers, aspirin, shoes, bubble gum and much more.
Geographically, the oil industry is dominated by the Middle East who export over 20,619,000 barrels per day which represent over 46% of global oil demand. Russia and Saudi Arabia are producing approximately 26 percent of the total global oil production and are currently considered to be the world’s top oil producing countries.
Annually, over 4 millions tonnes of oil is consumed globally and The United States is the single largest consumer of oil going through over 19,396,000 barrels per day.
Global Oil Industry Statistics (By Statista.com)
| Reserves and Production | Values |
|---|---|
| Volume of global oil reserves | 1,697.6 bn bbl |
| Percentage of global oil reserves in the Middle East | 47.3% |
| Share of global oil reserves in Venezuela | 17.7% |
| Top Companies | Values |
| Revenue of ExxonMobil | $259,488m |
| Revenue of PetroChina | €305,194m |
| Market value of Schlumberger Ltd. | $106.6bn |
| Refinery | Values |
| Global refinery capacity for crude oil | 97,227k bbl/d |
| U.S. oil refinery capacity | 18,315k bbl/d |
| Trade and Prices | Values |
| Global oil demand | 96.3m bbl/d |
| The Middle East is the leading oil exporter | 20,619k bbl/d |
| Europe is the leading oil importer | 3,847k bbl/d |
| UK Brent crude oil price | $42.66/bbl |
| Consumption | Values |
| Global oil consumption | 4,331.3m t |
| The U.S. lead in terms of oil consumption | 19,396k bbl/d |
Popular Traded Oil Types
With such high demand for oil, it is a highly liquid commodity and due to its main geographical sources combined with the political environment, it is a highly volatile market and prices can change drastically (demonstrated in the historical price table below). These two characteristics, high liquidity and volatility, are important for traders who are looking for instruments to day trade and make crude oil a popular instrument for traders.
Average annual UK Brent Crude Oil Price for last ten years (US dollars per barrel)
| Year | Annual Average Price | Percentage Change |
|---|---|---|
| 2006 | $65.14 | 19.79% |
| 2007 | $72.52 | 11.33% |
| 2008 | $96.99 | 33.74% |
| 2009 | $61.51 | -36.58% |
| 2010 | $79.47 | 29.20% |
| 2011 | $111.27 | 40.02% |
| 2012 | $111.63 | 0.32% |
| 2013 | $108.56 | -2.75% |
| 2014 | $99.03 | -8.78% |
| 2015 | $52.35 | 47.14% |
| 2016 | $46.55 | 11.08% |
Crude Oil is one of the most commonly traded commodities and is the most popular traded energy future (As of 3 Feb 2017 according to CME Group Top 10 Energy Products List). It is mainly traded on the New York Exchange, ICE futures and the Central Japan commodity Exchange(C-COM). Other popular commodities like Gasoline and heating oil are the derivatives of crude oil.
The three popular benchmark oils which most prices are pegged against are the Brent, WTI and the Dubai. Brent is the most popular and make up 2/3’s of all crude contracts.
The Top 3 Benchmark Oils: Brent, WTI and Dubai
Brent Crude, WTI and the Dubai are the main three benchmark oils which set the prices for their respective regions. All oil is not created equal and they are judged by their “sweetness” and “lightness”.
Crude oil that has lower levels (under 0.5%) of sulphur are known as sweet crude. Oil that contains a higher amount of sulphur is referred to as “sour”. Sulphur is a corrosive which results in higher costs of refining, storing, transporting and maintenance of sour crude, therefore sweet crude will command a premium over sour crude.
Another important characteristic is the lightness of the oil measured by API gravity set by the American Petroleum Institute. The basic premise of the test is to compare the Oil’s heaviness with that of water. If the API gravity is more than 10 than it will be regarded as a light oil and if it is less than 10 then it will be regarded as a heavier petroleum liquid.
Light oil is seen as the better oil as it requires less effort and cost to refine into premium products like gasoline and diesel fuel. Therefore a combination of light and sweet would be the highest quality crude oil.
Brent oil is lighter than WTI and it is taken from 15 different oil fields in the North Sea. Brent oil is refined in the west Europe and it is regarded as the main benchmark for other crude oils in Europe. When financial news in the UK and other European countries reference the price of oil, it is normally referring to the price of Brent oil.
The West Texas Intermediate more commonly known as WTI Crude is the benchmark for the US whilst the Dubai is the benchmark for Persian oil.
Trading as a CFD vs a Future
Two popular Crude oil futures for trading are the US WTI which is traded on the New York Exchange (NYMEX) and the Brent crude which is traded on the Inter Continental Exchange (ICE).
A future contract is a standardised forward contract which means that among other details, its price, size and settlement date is fixed. CFDs in comparison to Future contracts have a much smaller contract size and most CFD brokers like London Capital Group will offer leveraged trading for clients to trade larger positions with a smaller capital requirement.
A simple example of trading WTI Crude oil comparing a Futures contract vs a CFD
Minimum Futures Contract Trade:
Average monthly price for WTI Crude in December 2016 of $51.97 / barrel
Contract size for Crude = 1,000 barrels
Therefore a minimum trade for a single futures contract would be 1000*$51.97 = $51,970 for WTI Crude.
Minimum Trade with CFD
London Capital Group offer a minimum margin for US Crude (WTI) of 0.5% and a minimum trade size of 0.1 lot (contract size). Therefore the cost of a trade of US Crude using London Capital Group in this example would be $259.85 (100*51.97/200=259.85).
London Capital Group Contract Specifications for Crude Oil
To see more trading details about the 5,000+ instruments on offer, click here: London Capital Group
| Market | Trading hours | Min spread | Min trade size | Unit risk | Value of 1 pip/lot | Min Margin | Guaranteed Stop change |
|---|---|---|---|---|---|---|---|
| US Crude | 23:00-22:00 | 4 | 0.1 lot | 0.01 | $10 | 0.05% | 4 |
*All information collected from https://www.lcg.com/uk/, see website for full terms and conditions. Your capital is at risk. Last updated on February 6, 2017.
WTI Crude Futures Product Specs (for full details visit ICE)
| TRADING SCREEN PRODUCT NAME | WTI Crude Futures |
|---|
| TRADING SCREEN HUB NAME | WTI |
| CONTRACT SYMBOL | T |
| TRADING HOURS | Open time for Monday morning/Sunday evening is: 23:00 London (local time) |
| CONTRACT SIZE | 1,000 barrels |
| UNITS OF TRADING | Any multiple of 1,000 barrels |
| CURRENCY | US Dollars and cents |
| TRADING PRICE | One cent ($0.01) per barrel |
| SETTLEMENT PRICE | One cent ($0.01) per barrel |
| MINIMUM PRICE FLUX | One cent ($0.01) per barrel |
| CLEARING | ICE Clear Europe guarantees financial performance of all ICE Futures Europe contracts registered with it by its clearing Members. |
| CONTRACT LISTING | Up to 108 consecutive months |
| POSITION LIMITS | The Exchange may impose position accountability levels or limits on positions in this contract at its discretion as provided in Rules P8 and P3 respectively. |
| LAST TRADING DAY | Trading shall cease at the end of the designated settlement period on the 4th US business day prior to the 25th calendar day of the month preceding the contract month. |
| SETTLEMENT | The West Texas Intermediate Light Sweet Crude Oil futures contract is cash settled against the prevailing market price for US light sweet crude. |
| BUSINESS DAYS | ICE Business Days |
| LINKED FUTURE | Yes |
| MIC CODE | IFEU |
| CLEARING VENUES | ICEU |
Difference between Spot Oil and Oil Futures
| Spot Oil | Oil Futures |
|---|---|
| Oil Spot contracts are effective immediately as money is exchanged on the immediate delivery of oil. | Oil Futures is an agreement to buy and sell oil at a predetermined date at a set price. |
| Oil Spots are usually traded in the Forex market. | Oil Futures are traded on the New York Mercantile Exchange (NYMEX) and the intercontinental Exchange (ICE). |
| Spot oil prices are normally lower because it usually involves small quantity. | Oil Futures are expensive as compared to oil spot contracts. |
| Oil Spots do not provide any security to the buyer as the prices are depended on the current market situation. | Oil Futures usually involves margin which gives a security to the buyer that covers the percentage of the total value of the contract. |
Summary: Trading Crude Oil
Crude oil is one of the most popular traded commodities due to its highly liquid and volatile nature. A CFD Broker will allow a trader to trade crude oil with a smaller capital requirement due to leverage and smaller contract sizes.
