Oil trading at FOREX.com:
Oil contracts at FOREX.com trade like currency pairs, though with different margin and leverage. One oil contract represents 100 barrels (bbls) of oil, priced in US dollars.
Oil contracts are 'Contracts for Difference' (CFDs), which are over-the-counter trading instruments with an expiry date that are cash settled.
Types of oil
FOREX.com offers clients 2 oil contracts – Brent Crude (BCO/USD) and West Texas Intermediate (WTI). Crude oils are classified as either Light or Heavy depending on their API gravity, and as either Sweet or Sour, depending on their sulphur content. Brent Crude is a "light, sweet" blend, gathered from several oil fields in the North Sea, which is where the name 'Brent' comes from. It is typically priced higher than the OPEC composite price. West Texas Intermediate (WTI) is a "lighter, sweeter" blend, and is typically priced higher than Brent. (Source: The Energy Information Administration)
Trading hours
Trading hours are the same for all oil products: Sunday 20:00 EST (01:00 UK time) until 17:00 EST (22:00 UK time) Friday.
There is a daily break in trading from 18:00 EST (23:00 UK time) until 20:00 EST (01:00 UK time).
On the monthly expiration date, trading in the contract will expire at 14:30 EST (19:00 UK time)
Trading hours for the FOREX.com contract will also be impacted by exchange holidays
Oil contracts at FOREX.com trade like currency pairs, though with different margin and leverage. One oil contract represents 100 barrels (bbls) of oil, priced in US dollars.
Oil contracts are 'Contracts for Difference' (CFDs), which are over-the-counter trading instruments with an expiry date that are cash settled.
Types of oil
FOREX.com offers clients 2 oil contracts – Brent Crude (BCO/USD) and West Texas Intermediate (WTI). Crude oils are classified as either Light or Heavy depending on their API gravity, and as either Sweet or Sour, depending on their sulphur content. Brent Crude is a "light, sweet" blend, gathered from several oil fields in the North Sea, which is where the name 'Brent' comes from. It is typically priced higher than the OPEC composite price. West Texas Intermediate (WTI) is a "lighter, sweeter" blend, and is typically priced higher than Brent. (Source: The Energy Information Administration)
Trading hours
Trading hours are the same for all oil products: Sunday 20:00 EST (01:00 UK time) until 17:00 EST (22:00 UK time) Friday.
There is a daily break in trading from 18:00 EST (23:00 UK time) until 20:00 EST (01:00 UK time).
On the monthly expiration date, trading in the contract will expire at 14:30 EST (19:00 UK time)
Trading hours for the FOREX.com contract will also be impacted by exchange holidays
Who trades Oil, and why?
Trading in petroleum products spans many industries, and as such, is affected by both high-level geopolitical factors, as well as the trading activities of speculators. Players in the global oil trade range from entire economies, to large corporations, to traders on exchanges, down to the average daily consumption of gasoline in your car. Airlines may use oil trading to protect against an anticipated price increase, and Wall Street traders may trade oil futures to attempt to profit from market movements. The factors that may influence the price of oil are similar to that of a currency pair, in that they are affected by market-forces. These can be political, financial, or even weather-related.
How is the FOREX.com oil price derived?
FOREX.com's prices for BCO/USD and WTI/USD are derived from the prices of futures trading on the Intercontinental Exchange (ICE).
Our price is derived from the current (front month) price of the ICE contract up to the 2nd Wednesday of each month, Between that date and the expiry date of the ICE contract, the FOREX.com oil contracts will be priced from the next futures contract month to avoid expiry-related volatility.
How to read an oil quote:
Reading an oil quote is very similar to reading a Forex quote. It is represented the same way, e.g. BCO/USD, or WTI/USD.
Oil prices are quoted internationally in US dollars per barrel. A quote of 45.50 for BCO/USD means that 1 barrel of Brent Crude oil is worth $45.50.
Bid, ask and the spread
Just like other markets, Oil, spot gold, and forex quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL.
The ASK is the price at which you can BUY.
The difference between the bid and ask prices is called the spread.
Trading oil – using BCO/USD as an example:
A typical quote you might receive for Brent Crude is 50.55/62. This means that you could sell one or more lots of BCO/USD at 50.55, or buy at 50.62. The spread you would pay in this example is the difference between the bid and the ask prices (50.62 - 50.55) = 0.07.
The size of the trade you place will determine the amount of profit or loss generated by a price movement. The smallest amount of Brent Crude you can trade with FOREX.com is 1 lot, which represents 100 barrels. At 1 lot, the smallest price change possible (0.01) is equivalent to $1.00.
Let's look at some examples:
Example 1:
You buy 1 lot of BCO/USD (Brent Crude) at 50.55.
A few minutes later, the bid (or sell) price has risen to 50.90, and you decide to exit your trade.
You bought 1 lot at 50.55 and sold at 50.90, making 45 pips in the process (50.90 - 50.55).
Profit on your trade is calculated as 45 pips, at $1 per pip = $45.00
Example 2:
You once again buy 1 lot of BCO/USD at 50.55.
A few minutes later, the bid (or sell) price has weakened to 50.20 and you decide to close your position to cut your loss.
You bought 1 lot at 50.55, and sold at 50.20, a difference of 35 pips.
Loss on your trade is calculated as 35 pips, at $1.00 per pip= $35
Pips or points?
Like forex and spot metal prices, oil prices are quoted in very small increments called points, or pips ("percentage in point"). A pip refers to the second decimal place for an oil quote, i.e. 0.01. Each pip represents 1 cent in dollar value
When calculating the value of your trade, remember that oil trades in lots of 100 barrels. This means that a one pip (1 cent) movement in the oil price represents a $1 price movement for each lot that you are trading.
Reading an oil quote is very similar to reading a Forex quote. It is represented the same way, e.g. BCO/USD, or WTI/USD.
Oil prices are quoted internationally in US dollars per barrel. A quote of 45.50 for BCO/USD means that 1 barrel of Brent Crude oil is worth $45.50.
Bid, ask and the spread
Just like other markets, Oil, spot gold, and forex quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL.
The ASK is the price at which you can BUY.
The difference between the bid and ask prices is called the spread.
Trading oil – using BCO/USD as an example:
A typical quote you might receive for Brent Crude is 50.55/62. This means that you could sell one or more lots of BCO/USD at 50.55, or buy at 50.62. The spread you would pay in this example is the difference between the bid and the ask prices (50.62 - 50.55) = 0.07.
The size of the trade you place will determine the amount of profit or loss generated by a price movement. The smallest amount of Brent Crude you can trade with FOREX.com is 1 lot, which represents 100 barrels. At 1 lot, the smallest price change possible (0.01) is equivalent to $1.00.
Let's look at some examples:
Example 1:
You buy 1 lot of BCO/USD (Brent Crude) at 50.55.
A few minutes later, the bid (or sell) price has risen to 50.90, and you decide to exit your trade.
You bought 1 lot at 50.55 and sold at 50.90, making 45 pips in the process (50.90 - 50.55).
Profit on your trade is calculated as 45 pips, at $1 per pip = $45.00
Example 2:
You once again buy 1 lot of BCO/USD at 50.55.
A few minutes later, the bid (or sell) price has weakened to 50.20 and you decide to close your position to cut your loss.
You bought 1 lot at 50.55, and sold at 50.20, a difference of 35 pips.
Loss on your trade is calculated as 35 pips, at $1.00 per pip= $35
Pips or points?
Like forex and spot metal prices, oil prices are quoted in very small increments called points, or pips ("percentage in point"). A pip refers to the second decimal place for an oil quote, i.e. 0.01. Each pip represents 1 cent in dollar value
When calculating the value of your trade, remember that oil trades in lots of 100 barrels. This means that a one pip (1 cent) movement in the oil price represents a $1 price movement for each lot that you are trading.
Oil Market Drivers:
The price of oil can be influenced by a wide range of factors:
Supply and Demand
Oil is a tangible and in-demand commodity. The largest consumer and importer of oil in the world is the United States, followed by China and Japan. Anything that disrupts the supply of oil is guaranteed to influence its price. Factors such as extreme weather, war, terrorism, political unrest, and OPEC production decisions have the potential to push the price of oil up and down.
Since oil is used in the manufacture of many different consumer products, from gasoline and heating oil to fertilizer and cosmetics, the demand for these products can also have an effect on the value of crude oil. When consumption falls in these products, the demand for crude oil also falls, and this can have a negative effect on prices.
Inventory numbers, sales figures and the EIA petroleum status reports all serve to shed light on the difficult task of measuring overall oil consumption. Traders can look to these reports and announcements to better understand the factors influencing the consumption of oil.
Seasonal Factors
The seasonal consumption pattern can also have an effect on the price of crude. During cold-weather months, more heating oil is consumed than in warmer months. In contrast, the "summer driving season" in the US frequently sees a rise in the price of gasoline, in reaction to increased demand. The hurricane season in the Gulf Coast of the United States also has potential to influence the price of oil, since hurricanes pose a threat to refineries located in the Gulf of Mexico. Speculators are aware of these patterns and their sentiment may influence their trading decisions.
Speculation
Recently brought to the forefront of the global oil debate, thanks to the extreme price-spike in the summer of 2008, is the role of speculators in determining the price of oil. While speculators do serve to provide liquidity to a market, the fact that traders without the need for physical delivery of the commodity have the ability to significantly move the price of oil has raised eyebrows around the world. The most fundamental fact regarding speculators' presence in the market is that traders' sentiment may not be strictly supply and demand based, and as such the expected influence of supply and demand on prices may not always be as important as the overall market sentiment towards the direction of oil prices.
Currencies
Since oil is quoted in U.S. Dollars, many of the factors influencing the dollar can carry over into the oil markets. In a general way, the direction of oil prices is regarded as being opposite to the direction of dollar strength. A stronger dollar means that it takes fewer dollars to purchase a barrel of oil. This is typically good for consumers. Inter-currency relationships then come into play, since a barrel of oil worth $100 is good for producers (and bad for consumers) when the dollar is strong relative to other currencies. However, if $100 only translates to 64 Euros (a weak dollar), high oil prices might not mean as much to producers, since their profits in dollars would not be worth as much.
The price of oil can be influenced by a wide range of factors:
Supply and Demand
Oil is a tangible and in-demand commodity. The largest consumer and importer of oil in the world is the United States, followed by China and Japan. Anything that disrupts the supply of oil is guaranteed to influence its price. Factors such as extreme weather, war, terrorism, political unrest, and OPEC production decisions have the potential to push the price of oil up and down.
Since oil is used in the manufacture of many different consumer products, from gasoline and heating oil to fertilizer and cosmetics, the demand for these products can also have an effect on the value of crude oil. When consumption falls in these products, the demand for crude oil also falls, and this can have a negative effect on prices.
Inventory numbers, sales figures and the EIA petroleum status reports all serve to shed light on the difficult task of measuring overall oil consumption. Traders can look to these reports and announcements to better understand the factors influencing the consumption of oil.
Seasonal Factors
The seasonal consumption pattern can also have an effect on the price of crude. During cold-weather months, more heating oil is consumed than in warmer months. In contrast, the "summer driving season" in the US frequently sees a rise in the price of gasoline, in reaction to increased demand. The hurricane season in the Gulf Coast of the United States also has potential to influence the price of oil, since hurricanes pose a threat to refineries located in the Gulf of Mexico. Speculators are aware of these patterns and their sentiment may influence their trading decisions.
Speculation
Recently brought to the forefront of the global oil debate, thanks to the extreme price-spike in the summer of 2008, is the role of speculators in determining the price of oil. While speculators do serve to provide liquidity to a market, the fact that traders without the need for physical delivery of the commodity have the ability to significantly move the price of oil has raised eyebrows around the world. The most fundamental fact regarding speculators' presence in the market is that traders' sentiment may not be strictly supply and demand based, and as such the expected influence of supply and demand on prices may not always be as important as the overall market sentiment towards the direction of oil prices.
Currencies
Since oil is quoted in U.S. Dollars, many of the factors influencing the dollar can carry over into the oil markets. In a general way, the direction of oil prices is regarded as being opposite to the direction of dollar strength. A stronger dollar means that it takes fewer dollars to purchase a barrel of oil. This is typically good for consumers. Inter-currency relationships then come into play, since a barrel of oil worth $100 is good for producers (and bad for consumers) when the dollar is strong relative to other currencies. However, if $100 only translates to 64 Euros (a weak dollar), high oil prices might not mean as much to producers, since their profits in dollars would not be worth as much.
FOREX.com's leverage for Brent Crude and West Texas Intermediate oil contracts is set at 20:1. This means that for every $1 you have in your account balance, you have $20 in buying and selling power for oil trading. Keep in mind that leverage increases risk over full value trading.
How margin for oil trading works
MMargin is the amount of money you must have in your account to open and maintain a position. At 20:1 leverage, your margin factor is 0.05 (5%). This means that you are required to have a minimum cash balance of 5% of the total value of the oil positions you hold in your account at any one time.
At FOREX.com your risk is limited to the funds you have on deposit with us. There are no margin calls, so if your account balance falls below the margin requirement we will automatically close your positions to ensure that you cannot lose more money than you have in your account.
As an example:
The current West Texas Intermediate price is quoted as WTI/USD $51.55
You buy 1 lot (100 bbls) at $51.55.
Your margin requirement is 5% of your trade size, and is calculated as follows:
Trade size x price x margin factor (percentage)
100 (bbls) x $51.55 x 0.05 = $257.75
Another way to look at this example is to say that 20:1 leverage gives you the ability to trade 100 barrels of West Texas Intermediate at 51.55, with $257.75.
Calculating Profit and Loss
Profit and loss calculations for trading oil are fairly simple.
The smallest increment of an oil price is 0.01. The smallest trade you can place is a single lot, or 100 barrels (bbls). At this level, each pip is worth $1.00.
A change in price from 52.55 to 52.85 means a difference of 0.30, or 30 pips. If you are trading 1 lot, and each pip is worth $1, then the profit or loss from this price movement would be $30.00.
If you trade more than one lot, the value of each pip is simply multiplied by the number of lots you are trading. Rather than each pip being worth $1.00, if you are trading 5 lots then each pip is now worth $5.
FOREX.com's prices for BCO/USD and WTI/USD are derived from the price of Brent Crude and West Texas Intermediate futures trading on the Intercontinental Exchange (ICE).
Our prices are derived from the current (front month) price of the ICE contract up to the 2nd Wednesday of each month, Between that date and the expiry date of the ICE contract, the FOREX.com contracts will be priced from the next futures contract month to avoid expiry-related volatility.
Futures contracts have an expiry date, meaning that you can purchase a contract that expires in May, and/or a separate contract for June, July, etc. When trading these futures contracts, the trader has to decide whether to let the contract expire and take delivery of the oil, sell it before the expiry date, or "roll over" their trade to the next contract month.
Because the FOREX.com BCO/USD and WTI/USD contracts are based on the price of the futures contracts, they have an expiry date. At the close of trading on the date of expiry, all open positions and orders will be closed or cancelled.
To view FOREX.com's expiry dates, click here.
FOREX.com oil contracts expire on the 2nd Wednesday of every month, which is typically several days ahead of the ICE expiration date. This is done to avoid expiration-related volatility that often occurs in the futures contract price.
At 14:30 EST (19:00 UK time) on the date of expiration, all open BCO/USD and WTI/USD contracts with FOREX.com will be closed and cash settled at the closing contract rate. All Open Orders will also be closed. When FOREX.com re-opens oil trading,contracts will be priced against the current rate for the next futures expiry month. FOREX.com will reopen the market as soon as all expiry-related procedures are completed.
It is not possible to automatically roll over your BCO/USD or WTI/USD positions with FOREX.com - you will need to open a position in the new contract month when it becomes available for trading.
Contango and Backwardation
There is typically a difference in price between the closing price for the expiring month, and the opening price for the next month. This is caused by investors' expectations for the direction of future price movements,
A scenario where the more distant months are priced higher than the current month is called Contango. For example, if the May contract expires at $55, the June contract may open for trading at $56, $57, or higher in a 'contangoed' market
The opposite is true for a market in backwardation. A June contract expiry at $50 might see a July contract open at $47.