Oil Futures Trading

No longer exclusively for elite traders, oil futures trading became more accessible for so-called common investors as a result of events in the 1970s that altered the market. "And he shall bring it to Aaron's sons the priests: and he shall take thereout his handful of the flour thereof, and of the oil thereof, with all the frankincense thereof; and the priest shall burn the memorial of it upon the altar, to be an offering made by fire, of a sweet savour unto the LORD:" (Leviticus 2:2). It used to be true that this field was pretty much a mystery to most traders. In addition to being unfamiliar with that market, the majority of traders lacked the capital needed to open the account. Therefore, so-called common investors lacked both the ability and the opportunity. But since the 1970's, opening a commodity futures trading account has been within the reach of many more prospective traders. And the business of trading oil can be a very lucrative venture. In fact, where the benefits are concerned, crude is often referred to as the money machine.

First of all, trading was affected in the 1970's not only by turmoil in the Middle East, but also by world politics in general. Added to that, were the effects of global warming. Furthermore, ethanol, hybrid cars and advances in technology all played their part. As a result of this, prices began to change at a much more rapid rate. And due to the change in the trading range of prices, opening a commodity futures trading account, and thus obtaining the chance to enjoy the lucrative benefits of crude oil, became more accessible to the general public. This is because the contracts used were for a minimum of a thousand barrels. The term cracked is used when describing the process of breaking down one barrel into 42 gallons of gas. And so, when an individual considers how expensive 42 gallons multiplied by the 1,000 barrels would be, then it is understandable that only the wealthy could afford to become involved. In other words, instead of remaining the exclusive domain of the very rich, the oil futures trading market experienced a dramatic change.

By definition, futures trading implies the trading of commodities, such as oil. And, also by definition, engaging in oil futures trading involves agreements to either deliver or purchase oil at some determined future point at a pre-determined price. Incidentally, the features of sweet vs. sour and light vs. heavy have an influence upon the price. According to experts, refiners prefer light sweet crudes, such as Brent. Light is the term used to describe this kind because of the high API degree, which means a high viscosity number. And the reason behind the refiners' preference is twofold: sulphur and yields. In the first place, light sweet crudes have a low sulphur content. Moreover, this kind of crude has a higher yield of valuable products. Heating oil is an example of these products. Further examples are jet and diesel fuel, as well as gasoline. Also, crudes that are heavy sour, such as Arab oil, require much more time and effort to refine. And as far as sulphur is concerned, sweet contains 0.5% as opposed to a sour such as Nigerian 'Sweet Bonny' which has 3.5%.

When engaging in oil futures trading, an individual purchases the right to buy or sell a thousand barrels. Attached to these barrels of crude is both a set price and a set expiration date. However, a person should realize that this does not imply an obligation to either buy or sell. By the way, a purchase is known as a call, and the proper term for selling is a put. Further, the pre-determined price is referred to as the strike price. And the amount of money paid for the crude futures option is known as a premium. However, bear in mind that although the investor is not obligated to either call or put, if the contract is not sold by the expiration date, after that date the contract becomes worthless. Investors arrive at their price by first examining projected supply and demand reports. Subsequently, they enter a bid that displays what they have concluded to be the accurate price of trading oil futures. And despite the fact that there are many different kinds of crude, and although prices differ just as much, globally speaking they all move in a similar direction and at the same time. Within this market, the price similarity is known as correlation. Indeed, correlation, arbitrage and volatility are major profit components.

To understand these components of oil futures trading, an individual must first become acquainted with Exchange Traded Funds, also called ETF's. Exchange Traded Funds keep an eye on virtually every commodity within the futures markets. The oil futures trading market is monitored by an ETF known as the USO. Incidentally, the reason a person can trade options on the USO ETF is that it is traded similar to stocks. To begin with, profits can be earned from a correlation when one crude's price increases by a certain amount and another kind should, based on the investor's calculation model, also increase by a relative amount. But with arbitrage, profits are earned from non-permanent price differences. In other words, the investor purchases the crude that is cheaper than the relatively more expensive one, while selling the higher priced one simultaneously. Then when the prices return to their normal level, the investor closes both trades. Lastly, in order to earn profits from volatility, knowledge of both the product to be traded as well as market operations related to that product is essential. That is to say, there are a number of variables involved with volatility profits.

Finally, a person should be aware that premiums include neither commissions nor any kind of fee. However, these three represent the maximum amount of loss that the speculator risks from buying an option. Nevertheless, just because the field is easier to enter does not negate the fact that, largely due to the volatility of the market, these investments are very risky. Also keep in mind that, even though an individual no longer needs to be wealthy to engage in oil futures trading, the minimum start up capital tends to be around $5,000. But all in all, especially if one bases a trade decision on technical analysis, even those who are not wealthy can take a chance on accumulating wealth with oil futures trading.

Heating Oil Futures

Heating oil futures are investments on petroleum products that are normally kept in storage tanks above the ground and used in furnaces and boilers. Some sources compare heating oil to diesel fuel because the mixtures are similar and they burn at a lower temperature compared to some other heating sources. Natural gas and propane are more readily available in some parts of the country but in the areas they are not heating oil is often used because the cost is less than other types of fuels. Heating oil futures include options that give the buyer the right to a piece of the asset. Another popular term associated with this type of fuel is known as the crack spread. The crack spread is often based upon the profit margin made on petroleum products and is a common term used among traders. "And unto one he gave five talents, to another two, and to another one; to every man according to his ability; and straightway took his journey. He that had received the five talents went and traded with the same, and made another five talents" (Matthew 25:15-16).

Oil companies that refine their own products and sell to retailers are often cushioned from economic adversity when price changes occur because they also sell their products to the wholesale market. Another way that companies can protect themselves when economic diversity happens is by investing in heating oil futures and them selling them. Oil companies that have a system of transforming natural resources into a finished product are known as supply chains. Manufacturers extract the natural resources and refine the product by creating a mix of raw materials and components that make the final product which is then delivered to customers.

The forces of supply and demand determine how heating oil futures prices are set on a daily basis. The investor who purchases the option contract must fulfill the contract on the settlement date determined by the contract. On the settlement date the determined price will allow the seller or the buyer to lose or make a profit. Settlements can be realized through a physical settlement or through a cash settlement. The asset can be a barrel of oil or some other type of commodity. Futures contracts are often sold by farmers and other producers as a way to guarantee a specific price so that they can plan ahead. Selling options ahead of time can help them to have resources to cover feed costs and so on.

Popular traded commodities include agriculture such as grains, sugar, cotton, coffee, meat, livestock, metals, crude oil, natural gas, propane, heating oil, and environmental products that help energy efficiency. On the open market there are exchanges that regulate the trading of any type of commodity. The exchange authority makes sure that all trades including heating oil futures are conducted within the regulations set in place to protect all parties involved. These exchanges are under government control. They are not set up just for popular traded commodities but are set in place for any type of trade or investment that can occur within an open market.

An asset or instrument that is used to establish futures contracts can be set up on the open market if they are of interest to a buyer or investor. These can be in the market of heating oil futures or even in foreign currency. Some sources say that trading commodities began with rice, silk, and tulips. After that followed grains, meat, livestock, and energy. Trading assets and other types of products help economies and companies involved in the trading. Internationally this can have a large impact on an entire economy. This can be seen with the energy market and oil in particular. All countries need some form of energy to be able to live and prosper. Energy is needed to keep warm and to stay cool. Energy is needed to run a transportation system or just an individual's vehicle.

Those who might be guilty of breaking rules and regulations set down by the trading commission can be fined and punished depending upon the severity. Heating oil futures are regulated by the Commodity Futures Trading Commission which is an agency of the government that is run independently. Transactions are monitored consistently to make sure that all transactions are done legally and within the contracts where they fall. The trading commission helps to protect the public and those who trade on the market. They help to maintain an open and honest market so that other companies and countries will want to invest in commodities where supply and demand determines what is just and fair.

The open market was created to help merchants to trade their products without chaotic fluctuations in pricing. Cash forward contracts were made as an investment in future deliveries of commodities. Heating oil futures provide a buyer with a promised amount of assets in a specific amount of time. The buyer makes an agreement with the seller. At the time of delivery the set amount on the price is honored regardless of what the price is at that future date. This guarantees that the seller will sell the commodity and will guarantee the buyer a specific price based upon an agreed contract. The forming of the exchange commission has helped to keep these guarantees in place along with other rules and regulations that guarantee both the seller and the buyer with a fair way to trade.

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