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Market Spotlight: Crude Oil


What is Crude Oil Futures

Before we get into talking about the market itself, its important to know what crude oil is exactly and the important terms associated with it. When your reading a report coming out or hear an analyst talk about crude oil you want to be able to follow along easily and understand what your hearing. Crude Oil (aka Petroleum) is a liquid found deep in the earth made up of organic compounds, metals and hydrocarbons. Hydrocarbons are the main ingredient in crude oil and depending on the kind of petroleum and how it was gathered there can be more or less of the hydrocarbons, metals and organic compounds. Because of this crude oil can vary to be water-like all the way up to a thick almost solid heavy oil. The colors can vary as well from yellowish-gold to a motor-oil black.


Crude Oil Futures Highlights

As you can see “crude oil” is just a catch all term used to describe the varying types of petroleum from the ground. When you start to read or study reports (which you should if you interested in crude oil) You’ll see that all these properties are separated into four types of oil based on these three qualities: Viscosity- how easily the oil flows. Oil with a high viscosity store are thicker and usually take more energy and time to extract. Toxicity- This term is a little easier to understand right off the bat. It tells us how bad the oil is for the environment when its up out of the ground. Toxicity reports usually includes the impact on wildlife, groundwater and humans. Oil spills happen and when they occur we can see how bad and expensive the cleanup effort will be. In a report, especially during an oil spill you might see a classification given to the kind of oil. The environmental protection agency separates crude oil in four classes to show what kind of impact it will have on the surrounding environment during a spill: Class A- Clear, water like oils that can spread across most surfaces easily, including water. It evaporates easily, soaks into soil and sand and can remain there leaving long term damage. Most of the time these oils are flammable. Virtually all living things in the area of the spill are in danger of the toxic effects of the oil. Class B- The oil is a Class B is oily or wax like, less dangerous than Class A oils, the hotter it gets the easier they are absorbed by soil or sand. Class B oils are difficult to remove once absorbed. Class C- Tar like oils, these are medium to heavy grade oils that take much longer to be absorbed by the environment and don’t pose a serious toxicity risk. If the oil makes contact with water it can sink, if it comes into contact with wildlife it can smother or drown them. Class D- Very thick, these oils are non-toxic and usually don’t absorb into dirt or sand. Usually dissolves and cover areas when heated which makes for a difficult cleanup. Volatility- This term tells us how fast and easy the oil will evaporate. Typically, the higher the volatility score the more expensive it will be to extract, transport and hold. With these terms out of the way we can move to the four types of Crude Oil: Very Light Oils- When most people think of crude oil this type is usually what they are thinking of. Gasoline, Jet Fuel, Petroleum Spirits are all included in this class. Volatility is usually high. Light Oils- Diesel fuel and most domestic fuel oils- Volatility and Toxicity are usually medium. Medium Oils- Usually low volatility and high viscosity compared to the lighter oils. This means high toxicity and bad news if an oil spill happens. Heavy Fuel- The most toxic and viscous as well as the lowest volatility rating. Grade 3,4,5,6 and Heavy marine fuels make up this category.

West Texas Intermediate (WTI) Light Sweet Crude Oil

Now that we know some popular terms and what crude oil actually is lets look at the market we will be trading: Two primary markets dominate the Crude Oil trades: Western Intermediate (WTI) and Brent. West Texas Intermediate Light sweet crude oil is the most traded crude oil commodity in the New York Mercantile Exchange and the one we will be focusing on for the rest of the article. Light Sweet Crude Oil is classified because of its low sulfur content at about 0.24% sulfur, a lower concentration than its counterpart North Sea Brent crude. The “sweet” part of the name also has to do with the lower sulfur content, crude oils with more than 0.42% sulfur are classified as sour. What’s most important about WTI Light Sweet Crude is that it used as one of the two oil benchmarks in North America. What is a benchmark? Simply put: Benchmarks are a reference price for buyers and sellers of a commodity. When you hear the “price” of crude oil quoted in the media, they are quoting the price of Brent, WTI and Dubai crude (the other crude oil benchmark). Prices between these benchmarks do vary and the prices between WTI and Brent trade off of each other (the price of one affects the other), this is usually called the Brent-WTI spread. WTI oil is produced in America and is really comprised multiple sources of U.S. based light sweet crude oils. Its produced and refined in different areas of the us but mostly in the Midwest and Gulf areas. The delivery point for crude contracts (where the actual oil ends up) is located in Cushing, Oklahoma.

What the market is like and why we like to trade WTI Light Sweet Crude

The WTI Light Sweet Crude (CL) trades over 10 million contracts a month. This means that it can be sold or bought fast without affecting the price (this means it has great liquidity). Keep in mind that the risk is high with the contract unit being 1,000 barrels at $0.01 per barrel- this comes out to $10.00 a tick. The Light Sweet Crude Oil market is full of volume and incredibly volatile. Making it perfect for day/swing traders that know what they are doing. The Light Sweet Crude (CL)is typically dominated by hedge funds and professional traders, retail traders don’t have a lot of power here however that doesn’t mean that you can’t make money! Because of the volatile nature of the market we see retail traders often come in during big headlines and other major events looking to capitalize, a quick look at past charts during an economic event such as the GDP report and you’ll see the retail traders jump in. What moves the market and tips for trading the CLThe crude oil market can be a rollercoaster of emotions for the traders involved. The CL market can be affected majorly by an extensive array of news, events and reports. Supply and Demand is obviously the prime mover in price so look for anything that could have an effect on that, the following are some of the events to watch out for when trading the market: The crude oil inventory report- the report happens weekly and shows the stockpiles of unrefined petroleum by the barrel. If you’re going to trade crude oil you should know when this report is hitting. Study it and plan accordingly because it will almost always cause volatility. ( See Crude Oil Inventories Report) Under “key economic events” for more information. War/Tensions/News About International Trade- Crude oil is a globally traded commodity, even though the WTI Light Sweet Crude is produced in the US, events from around the world can and will have an effect on the CL market. Time of Year- When it gets hot people use more energy to cool their homes, business, cars etc. The same goes for the winter months, heaters are turned on everywhere, more crude oil is used. Look for a general rise in price around these times of year. Reports and News Releases From OPEC- The Organization of Petroleum Exporting Countries controls the global supply and demand for crude oil. Other Commodity Markets, Especially the U.S. Dollar- The USA is a major player in the oil industry and reports or events that effect the US dollar will most certainly effect oil prices around the world. Support and Resistance- Watch major support and resistance levels, the crude oil market trades well around these. Examples of these points are the Previous day high/low, Overnight High/Low and Close.


"Comparison: S&P 500 Index is much more diversified index compared to the NASDAQ or DOW. While Nasdaq contains both large and mid-cap stocks the S&P only contains large-cap stocks."


Conclusion

Trading crude oil can be an exciting and profitable market for a trader with a solid proven plan. The volatility and high volume give traders ample opportunity to take trades. However, the WTI Light Sweet Crude Oil market requires more planning and preparation then your typical market. Study the history of the market as well as the weekly reports, know the important scheduled economic events and watch for unscheduled events that can and will put pressure on crude oil. Below you can find the contract specifications of the market.


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