There has been tremendous innovation in the forex market in the last 10 years. As more brokers have entered the market and triggered an intense competition for clients, brokers have had to increase the appeal of their product offerings to drive in more traders through their doors. One of the methods that has been used by brokers is to increase the range of tradable products offered on their platforms.
Crude oil is one of the most important commodities in the world today. It is very difficult to understand what life today would be like without crude. A derivative of this product is used in some way in almost all spheres of everyday life, from transportation to the hospitality industries, to the polymer notes used in printing some of the world’s currencies down to components of mobile phones and tablets.
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Therefore, it is not surprising that there is always a continuous shift in the price of crude oil on a minute-by-minute basis as the demand and supply of the product and its derivatives changes. Previously available only to traders on the New York Mercantile Exchange (NYMEX), the crude oil spot and futures instruments are now available on many forex platforms.
For traders who use the MT4, it is possible to trade crude oil as one of several designated energy futures assets. The exact crude oil contract offered will differ from platform to platform.
Contract Designation of Crude Oil
Crude oil is traded as two separate instruments. These instruments correspond to the varieties of crude oil sold in the international market. These are:
a) Light Sweet Crude (WTI): This contract is offered as the West Texas Intermediate (WTI) contract, and is representative of the variety of crude oil which is low on sulphur compounds and therefore cheaper to refine. This is the light sweet crude contract.
b) Brent Crude: Brent crude is obtained from the North Sea area and other countries in the Arctic regions of the world such as the UK, Russia and Norway. This variety of crude is heavier (contains more sulphur compounds) and generally costs more than the light sweet crude variety, since it costs more to refine.
WTI is traded on NYMEX while Brent is traditionally traded on the ICE. The difference between the light sweet and Brent versions of crude oil mean that the Brent crude contracts are always priced higher than the WTI variety. On the trading platforms, you will see crude oil listed as US Oil (WTI) or UK Oil (Brent). So if you see WTI and Brent on your platforms, just know they refer to US Oil and UK Oil respectively.
Contract specifications refer to the peculiar features of the asset that affect the way traders trade the asset. The contract specifications for crude oil are as follows:
a) Market Hours
Unlike forex which is a 24-hour market, the crude oil market only trades at specific hours. Therefore, there will be times on your forex platform when you will be unable to open any trades, or manually close any open trades.
b) Duration of Contracts
Generally speaking, crude oil contracts tend to have expiration dates, On many platforms, a contact lasts for a month, but the longest a contract will stay is three months. This is an important fact to consider, as any positions that are still open by the expiration of the crude oil contract will be automatically liquidated and settled in either profit or loss. Therefore, the trader should trade in such a way that this rollover does not affect the position or the trade account adversely.
- Trader is short 5 contracts of US Oil @ 44.00, with contract schedule to expire on 30 April.
- If the price is at 46.45 on 29 April, this is the price at which the trade will be liquidated at 9.59pm GMT on this day.
- The position is automatically closed at 46.45 and the trader’s account is credited with the profit.
- If there are any pending orders (Buy Stop, Buy Limit, Sell Stop or Sell Limit orders), these will be cancelled since they are based on an expiring contract.
If you intend to keep trading, you will need to open a new contract at the new contract price, which may be different than the price at which the old contract was liquidated.
c) Margin Requirements
The crude oil market is extremely liquid and fast paced. Margin requirements for crude oil trading are much higher than is obtainable in forex. On a forex CFDs platform, the leverage will not usually be displayed, but when you set a crude oil trade, one thing that immediately hits you is that the used margin for a particular lot size is much more than would be required for a forex trade of the same size. So you need significantly more capital for trading crude oil on a forex platform than you would require for a currency trade.
d) Trade Conditions
When a trader decides to trade crude oil on a forex platform, certain conditions will apply to the trade. Some of these conditions are as follows:
- Minimum Price Fluctuation: What is the minimum price by which the crude oil asset will increase or decrease in price? Many platforms use 0.01 as the minimum price fluctuation. So if WTI is at 45.67, the minimum increase or decrease in price will take the asset to 45.68 or 45.66 respectively.
- Lot size: The size of one standard lot is 1,000 barrels.
- The value of 1 tick is $10.
- Minimum contract size: Traders can set a minimum of 0.01 lots as contract size.
- Minimum contract size increment: 0.01 lot.