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Commodity Investing: How To Trade Crude Oil Futures (UCO, USO, SCO, BNO)

July 25th, 2012

Jared Cummans: As one of the most significant resources in the world, crude oil is also a staple financial instrument for hegder, traders, and investors all across the globe. Keeping up with crude markets requires a keen attention to detail as well as patience in what is typically a volatile industry. For those looking to dabble in crude oil futures, there are a number of options available, leaving some to wonder where to begin. Below, we outline strategies for trading crude futures as well as a few other products that offer similar exposure [see also 25 Ways To Invest In Crude Oil].

The Exchanges

First things first, those looking to invest in futures will need to decide which exchanges they would like to utilize. Below, we outline three of the most popular options in the world for trading crude oil futures [for more updates on crude oil subscribe to our free newsletter].

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  •  New York Mercantile Exchange: When it comes to U.S. exposure, you will be hard pressed to find a better starting point than the NYMEX. The exchange offers multiple futures contracts, some of them optionable, for both West Texas Intermediate (WTI) and Brent crude. One benefit to these contracts is that they trade Sunday-Friday between the hours of 6:00 p.m. and 5:15 p.m (CST), meaning that investors can make a play for approximately 23 hours every day (there is a 45 minute break period between each day).
  • Intercontinental Exchange: Known as the ICE, this exchange offers two different contracts for Brent crude and one for WTI. The WTI contracts represent 1,000 barrels and are quoted in U.S. dollars and cents. Note that these contracts are nearly identical to those offered on the NYMEX [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].
  • Multi Commodity Exchange: For those looking stay invest abroad, the MCX offers exposure based out of India. A single contract for Brent and WTI is available on this foreign exchange, with WTI contracts representing 100 barrels each, making them ideal for those with smaller capital bases to work with. Note that the contracts are available Monday-Saturday, with no trading occurring on Sunday.

Common Crude Oil Trading Strategies

Though all commodities require active monitoring for sound trades, crude oil is known for its heavy intraday volatility and should be handled with care. It is not uncommon to watch oil prices start the day off way down and rally as markets come to a close (or vice versa). One of the most difficult aspects of trading crude is that sometimes its prices are reflective of how the overall economy is performing, and other times its prices signal how the economy will be acting. This commodity has its teeth sunk firmly into global markets and should be treated with respect from traders and investors. Finally, it is important to remember that as a primary trading instrument, developing trends in markets and how the majority of traders are behaving can also skew oil prices. Remember, the trend is your friend [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

For those who are uncomfortable with trading futures contracts, which are often quite dangerous, there are a number of ETFs to help you establish exposure to this fossil fuel. The United States Oil Fund (NYSEARCA:USO) is by far the most popular option, as this WTI-based fund has accumulated more than $1.3 billion in total assets. There is also the United States Brent Oil Fund (NYSEARCA:BNO) for those looking for Brent exposure; note that this fund is considerably less popular with just $48 million in total assets. If leveraged/inverse funds are in your wheelhouse, you have a number to choose from, like the ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) or the ProShares UltraShort DJ-UBS Crude Oil (NYSEARCA:SCO).

Further Resources and Reading

For further reading on crude oil and related topics, check out some of the links below.

Written By Jared Cummans From CommodityHQ  Disclosure: No Positions.

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


NYSE:BNO, NYSE:SCO, NYSE:UCO, NYSE:USO


 

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