Crude oil is one of the world’s most heavily traded commodities. Featuring consistent market depth, robust participation, and a multitude of underpinnings, the global oil complex is a target-rich environment for active traders around the globe.
Given its immense popularity, countless crude oil trading strategies are executed daily. Let’s take a look at a few hedging and speculative strategies for crude oil.
Crude Oil Trading Strategies: Hedging vs. Speculation
There’s no shortage of ways to trade crude oil. Whether you’re interested in outright futures, options on futures, or spreads, it’s not difficult to implement a viable hedging or speculative game plan. Ultimately, the responsibility falls on you to align available resources to trade-related objectives. Once you do this, you should be able to select an ideal instrument, market, and strategy for the job.
At the end of the day, all crude oil trading strategies may be divided into two classes: hedging and speculative.
Hedging strategies are used to manage risk exposure in the open market. Crude oil derivatives may be used to address systemic, currency-related, and financial risk.
For instance, futures or options contracts on North Sea Brent (Brent) or West Texas Intermediate (WTI) crude oil may be used to mitigate currency risk. Brent and WTI are priced in U.S. dollars, per the petrodollar system. That means if the USD loses value, crude oil pricing typically rises. In this way, market participants who are net-long crude oil futures or options are positioned to benefit from a falling dollar.
In addition to currency risk, large-scale producers often open short positions via crude oil futures and options to limit downside market exposure. When WTI or Brent loses value, profits from outstanding short positions may partially or fully cancel deficits sustained from their business operations.
Consistently strong liquidity and volatility make the crude oil markets attractive venues to speculators. Policy moves, evolving supply-demand levels, and geopolitical strife can send WTI and Brent trending quickly. The results are often spiking volumes, volatility, and advanced opportunities for speculators to cash in on pricing swings.
A vast majority of speculators employ intraday, day, or swing trading methodologies. The reduced trade durations enable capital to be routinely freed up and reintroduced into the markets. This flexibility reduces the opportunity costs involved with holding long-term investments. Accordingly, buying and selling front-month crude oil futures and options is the ideal mode of trade for crude oil speculators.
Trading the News
If you’re going to implement crude oil trading strategies, it is imperative that you understand the energy-specific news cycle. For WTI crude oil futures and options, the following news items can spike volatility and risk while creating opportunities:
- American Petroleum Institute (API) Weekly Statistical Bulletin: The API bulletin is designed to update the public on the current state of U.S. crude oil and refinements. Barring the presence of a holiday session, the API report comes out Tuesday at 4:30 p.m. EST.
- Energy Information Administration (EIA) This Week in Petroleum Report: Similar to the API bulletin, the EIA report is released weekly. Scheduled for delivery on Wednesdays at 10:30 a.m. EST, the EIA provides analysis on evolving U.S. crude oil supply-demand as well as on gasoline and distillates.
Although Brent futures and options may exhibit some sensitivity to the EIA and API reports, the action pales in comparison to that caused by an OPEC+ release. Because traders view Brent as the premier international crude oil contract, any news from OPEC+ has the potential to shake values dramatically. Production cuts or expansions, as well as price cuts or hikes, all have the potential of spiking volatility.
Both speculators and hedgers trade the news regularly. Hedgers often use long-term strategies, such as buying deferred-month put and call options, to limit exposure to unexpected moves in global supply and demand.
Conversely, speculators commonly implement scalping crude oil trading strategies to capitalize on swift moves in pricing following an API, EIA, or OPEC+ news release. This is typically done via buying or selling full-sized, mini, or E-mini Brent and WTI futures contracts.
Getting Started with Crude Oil Futures and Options Strategies
Whether you’re a hedger or speculator, the global oil complex is rife with opportunities. To learn more market game plans, checkout CME Group’s Introduction to Crude Oil course.