Crude Oil
Crude oil is the raw material that is refined into gasoline, heating oil, jet fuel, propane, petrochemicals, and other products. In today's complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges the New York Mercantile Exchange, the International Petroleum Exchange in London and the Singapore International Monetary Exchange.Prices of crude oil have always been politically volatile and are greatly influenced by supply and demand. They behave much as any other commodity with wide price swings in times of shortage or oversupply and in times of political instability. The crude oil price cycle may extend over several years.There are two types of crude oil, sour crude is primarily the type of crude that comes from OPEC, as opposed to West Texas Intermediate (WTI) or sweet crude. The WTI price is traded on the New York Mercantile Exchange (NYMEX).Crude oil began futures trading on the NYMEX in 1983 and is the most heavily traded commodity. It trades in units of 1,000 U.S. barrels i.e. 42,000 US gallons (1 contract), and the price is quoted in dollars and cents per barrel. The minimum price fluctuation in the price of crude oil is US$ 0.001per barrel ( US$ 10 per contract).Crude oil Futures trading has always been of tremendous interest to speculators who hope to profit from the ever changing price of this commodity.
Trading Crude Oil
Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying a futures commodity contract. If correct in forecasting the direction and timing of the price change, the futures contract can later be sold for the higher price, thereby yielding a profit. If the price declines rather than increases, the trade will result in a loss. Because of leverage, the gain or loss may be greater than the initial margin deposit.For example, assume it is now March; the May CL futures contract is presently quoted at US$ 37.50, and over the coming months you expect the price to increase. You decide to buy a contract of one lot by putting a margin (deposit) of US$ 1000. Further assume that by April the May CL futures price has risen to US$ 38.50 and you decide to take your profit by selling. Since each lot contract is for 1000 barrel, your 100 ticks a dollar profit would be
(Selling price - Buying price) x Contract size x Amount of lots
(38.50 - 37.50) x 1000 x 1 = US$ 1,000
Suppose however, that rather than rising to 38.50 the May CL futures price had declined to 36.50 and that, in order to avoid the possibility of further loss, you elect to sell the contract at that price. On 1000 barrel your 100 ticks a Dollar loss would thus come to US$ 1,000.
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