Did you know that oil is called black gold? It is the raw material that has moved the world for decades since its discovery last century. Controversial but necessary, this asset has been the cause of many solutions and many conflicts around the world.

With oil futures contracts, you have the opportunity to speculate on the price without having to buy the barrel physically. It is simple; you must take long or short positions depending on whether you expect the prices to go up or down.

Something fundamental is that you must consider the contract’s expiration date, which usually happens every three months. Suppose you do not close the position before the expiration date of the agreement. In that case, operations are automatically closed. Then, you will make profits or lose money depending on your entry price and the closing price.

In the development of this article, we will explain the fundamental and technical aspects that should be considered to succeed in trading oil futures contracts.

Fundamental aspects

Supply and Demand

Excess supply and decreasing demand cause traders to sell their contracts. Conversely, high demand and stagnant production encourage traders to buy contracts. For example, in mid-2015, oil prices fell to 40 dollars per barrel due to the US Energy Information Administration reporting a higher than expected inventory buildup, the excess supply with uneven demand.

Crude oil futures downtrend august June-August 2015

Another good example is the drop in US oil price in 2020, at the beginning of the global pandemic. It traded below 0 dollars, i.e., negative. 

American oil price crash in April 2020

Once again, this was caused by low demand and excess inventory of crude oil in storage in Cushing (Oklahoma).

Role of the Organization of Petroleum Exporting Countries (OPEC)

OPEC is an organization regulating oil production to stabilize prices and avoid the global oil spiral out of control. OPEC member countries produce about 40% of the world’s crude oil. Likewise, oil exports account for about 60% of total internationally traded oil. Because of this, the decisions of the leaders influence international oil prices. In particular, indications of changes in crude oil production in Saudi Arabia, the largest producer in the world.

Relation Saudi Arabia production and price in the last 20 years

The chart above shows how crude oil production in Saudi Arabia can influence the price of this commodity.

Global economy perception

Although oil is not consistently correlated to any other asset or commodity, the economic situation of the world’s power countries plays a fundamental role in whether an upward or downward trend develops for a longer or shorter period.

If you look at the months and years before the financial market crash in mid-2008, oil was in a significant uptrend, trading at over $140 a barrel. So before the crash, there was a lot of optimism in the markets. Then, however, major banks started to declare bankruptcy, triggering the fall of all markets, including the price of oil.

Oil price uptrend and downtrend 2008

What can we learn from this? First, depending on whether you want to invest in long-term contracts or to speculate in the short term, you have to be one step ahead of the majority, projecting the future state of the world economy in all aspects.

Technical aspects

One of the main advantages of this market is that it is relatively liquid. Therefore, it has a good trading volume that allows you to enter excellent prices due to tight spreads.

Some strategies and indicators will guide you to make short and long-term trades in the oil futures market. However, today we will talk about a simple method that will help you to identify and trade at the beginning of a trend.

Trading oil with technical analysis: MACD + Moving Averages

Using these two indicators, you will find suitable entry and exit points for trading. The MACD indicator helps us measure momentum. The 200-period Moving Average will allow us to identify dynamic support and resistance and possible trend initiation.

The following chart shows an example in which the price breaks above and is supported by the 200-period Moving Average (yellow line). Additionally, the MACD shows bullish momentum. These two signals are ideal for taking a buy position.

oil price uptrend November 2020

A stop loss should be placed below the yellow Moving Average as it will act as a support if the price falls. Then, we can wait for the development of the position, looking for a profit/loss ratio of 2 to 1 or when the MACD shows a convergence of the Moving Averages when prices are overextended, as we see in the example above.

Where to trade oil futures?

Both Brent and West Texas Intermediate (WTI) crude oil are traded on the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX). To find the best brokers and start trading, the first thing to do is enter the CME website and click on the Markets section. 

CME group web page

Once inside, select the Find a Broker option, where you will find the recommended brokers.

Conclusion

Oil is the most traded commodity of all, surpassing gold and silver. Therefore, it would be your first choice if you want to trade the commodities market.

It is important to emphasize that the fundamental aspects of investing in the long term have the most influence on the asset. Usually, the price is influenced by announcements from OPEC and the countries’ governments that produce large quantities of this commodity. Therefore, we should consider the ones in our investment plan.

Finally, trading oil futures considering the technical and fundamental aspects will give you a better view of the market to generate short, medium, and long-term returns.

Suppose you are one of the people who want to perform daily trades. In that case, the main thing to consider is that you have a strategy based on technical analysis. For this, you can use the one mentioned earlier in this article.