Gasoline Futures Trading Basics

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Gasoline Futures Trading Basics

Gasoline futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gasoline (eg. 50 kiloliters) at a predetermined price on a future delivery date.

Gasoline Futures Exchanges

You can trade Gasoline futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gasoline futures prices are quoted in dollars and cents per gallon and are traded in lot sizes of 42000 gallons (1000 barrels).

TOCOM Gasoline futures are traded in units of 50 kiloliters (13210 gallons) and contract prices are quoted in yen per kiloliter.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Gasoline Futures
(Price Quotes)
RB 42000 gallons
(Full Contract Spec)
USD 9,450 (approx. 20%)
(Latest Margin Info)
TOCOM Gasoline Futures
(Price Quotes)
50 kiloliters
(Full Contract Spec)
JPY 210,000 (approx. 13%)
(Latest Margin Info)

Gasoline Futures Trading Basics

Consumers and producers of gasoline can manage gasoline price risk by purchasing and selling gasoline futures. Gasoline producers can employ a short hedge to lock in a selling price for the gasoline they produce while businesses that require gasoline can utilize a long hedge to secure a purchase price for the commodity they need.

Gasoline futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable gasoline price movement. Speculators buy gasoline futures when they believe that gasoline prices will go up. Conversely, they will sell gasoline futures when they think that gasoline prices will fall.

Learn More About Gasoline Futures & Options Trading

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The Basics of Trading Crude Oil Futures

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Crude oil is one of the better commodities on which to trade futures contracts. The market is incredibly active, and it is well known to traders around the world. Oil prices fluctuate on the faintest whisper of news regarding pricing, which makes it a favorite of swing and day traders looking for an edge.

This volatile environment can provide some solid trading opportunities, whether your focus is on day trading futures or you are a longer-term trader. It may also provide great losses if you are on the wrong side of a price movement.

Crude oil is also one of the most actively traded commodities in the world.   The price of crude oil affects the price of many other commodities, including gasoline and natural gas. However, the ripple effect of crude oil prices also impacts the price of stocks, bonds, and currencies around the globe. 

Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector. 

Crude Oil Contract Specs

Trading crude can be confusing when you first get into it, and you should memorize these specifications before you consider beginning to trade. 

  • Ticker symbol: CL
  • Exchange: NYMEX
  • Trading hours: 9:00 a.m.–2:30 p.m. ET
  • Contract size: 1,000 U.S. barrels (42,000 gallons).
  • Contract months: All months (Jan.–Dec.)
  • Price quote: Price per barrel (example: $65.50 per barrel)
  • Tick size: $0.01 per barrel ($10.00 per contract)
  • Last trading day: Third business day prior to the 25th calendar day of the month preceding the delivery month

Traders are also advised to understand the futures market. When you trade a futures contract you have the obligation to either buy or sell—call or put—the commodity by the expiration date at the stated price. If you hold a call, the only way to avoid actually having to take physical delivery of 10,000 barrels of crude oil is to offset the trade before the expiration. Trading futures is not for the novice. 

Crude Oil Fundamentals

Despite using it every day, not many people know the differences between crude oil and gasoline. Crude is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel, and many other petrochemicals. The fundamentals are different since it is a raw product. Crude also comes in many different grades. 

Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). “Light Sweet” is the most popular grade of crude oil being traded because it is the easiest to distill into other products. 

Another grade of oil is Brent Blend Crude, which is primarily traded in London and is seeing increased interest. Russia, Saudi Arabia, and the United States are the world’s three largest oil producers as of 2020.   Brent is the most widely used benchmark for determining gasoline prices. 

West Texas Intermediate (WTI) is crude from U.S. wells. The product is light and sweet and ideal for gasoline. It trades under the CL ticker on the Chicago Merchantile Exchange (CME) and the NYMEX

Middle Eastern crude is known as Dubai and Oman oil. It has a higher sulfur content and falls into the category of heavy, sour oil. The Dubai Mercantile Exchange offers futures for this crude.

When crude oil is refined or processed, it takes about three barrels of oil to produce two barrels of unleaded gas and one barrel of heating oil.   This helps to put into perspective the production needs of crude, and why production and supply levels are watched so closely.

Crude Oil Reports

The main reports for crude oil are found in the U.S. Energy Information Administration (EIA) Weekly Energy Stocks report. This report is released every Wednesday around 1:00 p.m. ET, with traders eagerly awaiting its arrival. 

Tips on Trading Crude Oil Futures

Oil futures are notorious for their volatility. Here are some quick tips that you should look for when tracking price movement and making trades:

  • The price of unleaded gas and heating oil can influence the price of crude oil.
  • Demand is generally highest during the summer and winter months. Very hot summer or very active driving season (for summer vacations) can increase the demand for crude oil and cause prices to move higher.
  • An extremely cold winter causes a higher demand for heating oil, which is made from crude oil. This usually causes prices to move higher. Watch the weather in the Northeast, since it’s the part of the country that uses heating oil more than any other.
  • Watch for oil production cuts or increases from OPEC (Organization of Petroleum Exporting Countries), which determines global supply and demand for crude. 

Volatile Market for Crude Oil Futures

Crude oil often trades in a volatile environment. Major news events can happen overnight, causing oil prices to swing unpredictably and widely. The same thing can happen throughout the day since crude futures trade around the clock. Whether it’s an economic report or tensions in the Middle East, a tight supply situation can exacerbate price movement. 

Supply and demand obviously dictate how the price will move, but this market moves on emotion as well, especially with retail investors who day trade.

If tensions escalate in the Middle East, there’s no telling the extent of possible supply disruptions, and traders often react swiftly on the news, adjusting their strategy following price fluctuations.

Price Movements for Crude Oil

The reason prices move so swiftly is that traders who have short positions in the market tend to cover their shorts quickly if price creeps up, either eroding their gains or causing losses. In order to do this, they have to place buy orders to cover. This wave of buying is done at the same time speculators are jumping on board to establish or add to long positions. The shorts will cover quickly because the risk is just too great; if a major development arose that disrupted supply, shorts could theoretically lose more money than they invested, resulting in a margin call from their brokerage, one of the most dreaded calls in the world of investors.

The usual tendency is for oil prices to spike on news of turmoil in the Middle East. Then prices calm down and start to move lower unless there’s irrefutable evidence of major supply disruptions. Identifying these waves of buying and selling is very important if you want to avoid getting a haircut in the financial markets.

For the most part, crude oil tends to be a trending market, driven largely by psychological movement. There’s usually a major bias to the upside or downside. Trading from the trending side will certainly help improve your odds of success. Crude oil also tends to get stuck in prolonged ranges after a sizable move. A person who can identify these ranges has plenty of opportunities to buy at the low end and sell at the high end. Some investors trade the ranges until there’s a clear breakout either way.

The value of the U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices.   A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tend to support higher oil prices. However, oil prices moving too high can stifle the economy. Historically, oil prices tend to move opposite the stock market. This trend becomes a concern when oil prices approach the psychological price marker of $100 a barrel.

Day Trading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts very well to pivot points and support and resistance levels. You have to make sure you use stops orders in this market. Stop orders are automatically triggered trades that can help reduce the high risk of a market that can make very swift runs—up or down—at any given time.   Longtime energy trader Mark Fisher wrote an excellent book on day trading oil futures titled The Logical Trader.

There’s no shortage of trading opportunities. Most traders close their position end-of-day (EOD) to ensure they sleep at night, considering overnight volatility.

Many of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the E-mini S&P, you’ll probably like crude oil, too.

Crude oil entered a bear market in June 2020 when the price was just under $108 per barrel on the active month NYMEX crude oil futures contract. By February 2020, the price depreciated to under $30 per barrel. In January 2020, the price was trending around $53.84 per barrel for WTI Crude. As of December 27 2020, the price is on the rise at $61.72 per barrel. 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Introduction to Trading Natural Gas, Heating Oil & Gasoline

In this article, we will be discussing various energy commodities, namely natural gas, heating oil and gasoline. Natural gas and heating oil can both be categorized as distillate energies, or distillates, whereas natural gas is a commodity extracted by drilling for gas deposits often found alongside crude oil reserves.

What are Energies?

The term energy, when related to trading is a broad term used to describe commodities which can be used as a means of power.

What are Distillates?

Heating oil and gasoline both derive from distillation, which is the process by which crude oil is heated, and the resulting gasses are cooled at specific temperatures. The temperature at which the gasses are cooled will determine which form of energy is produced.

This differs from natural gas, which does not need any distillation and is found naturally underground. It is important to note that all of these resources are finite, and will one day run out.

Heating Oil

Heating oil and natural gas are both used to heat homes and buildings. Heating oil, also known as fuel oil or gas oil is a by-product of crude oil. Many homeowners prefer heating oil as their primary heating resource because of the fact that it is safe and traditionally cheaper than other heating fuels.

In the USA, the largest consumer, approximately 78% of houses in the north-east use heating oil. That equates to around 7.5% of residential homes in the country – a considerable market! The heating oil is burnt in a furnace to generate heat, and it is used in regions where the natural gas infrastructure is not linked to homes or commercial buildings.

Natural Gas

Natural gas, by comparison, is the most commonly used form of heating energy and is connected to most households directly via pipelines. After it is extracted from the ground, the natural gas must be treated in order to separate it into liquids and gasses suitable for transporting around the world (as liquid), and domestically in pipelines.

It must then be processed in specialist plants to ensure it meets quality specifications. This is an extremely complex and expensive process, and any disruption to the processing will impact upon prices. Natural gas also has other uses besides heating and these include the generation of electricity and cook food via gas ovens. This means that whereas heating oil will have strong seasonal demand, natural gas will be required consistently throughout the year. It is estimated that up to 25% of American energy consumption comes from natural gas.

Gasoline

Gasoline, also known as petrol, is similar to heating oil in that it is also a by-product of crude oil but is primarily used to power machinery, most notably cars. Gasoline is consumed across the world. It is important to note that there are other distillate markets besides heating oil and gasoline, and these include kerosene, jet oil and diesel, amongst others.

Although these markets are far smaller than gasoline and heating oil, as traders we must also monitor these when trading distillates as they have a very close correlation to one and other.

Supply and Demand Factors

When trading energies we have to remember that prices for heating oil, gasoline, and natural gas are determined by supply and demand factors, and are intrinsically linked to crude oil prices.

The two main distillate energies have a much-correlated relationship because the more of one energy that is produced, the less supply there will be of another. This is because if more crude oil is being used to produce gasoline, for instance, less crude oil is available to be used for heating oil. This fall in supply should, therefore, lead to an increase in heating oil prices.

The inverse is also true. If less of one distillate is produced, more is likely to be produced of others. An example can be seen in 2001 in the aftermath of the September 11th terrorist attacks. Because airports were shut, and demand for energies to power the planes fell, distillers decided to distill less jet fuel, and switch to heating oil instead.

This leads to a sudden increase in supply, and a consequent fall in heating oil price. This goes to show that not only are all distillate energies closely related, but they will also have a very close correlation with crude oil prices.

Seasonal Demand

Another factor to consider when trading distillates is seasonal demand. Due to the fact that heating oil is used primarily for heating fuel, it is an incredibly seasonal market and prices are largely dependent upon winter weather.
In particularly severe or cold winters, demand increases, and consequently prices rise. However warmer winters will lead to reduced demand and lower prices. As such, heating oil traders will pay close attention to weather patterns in order to ascertain potential usage.

Although natural gas is also used as heating fuel, the seasonality of natural gas differs. This is because the demand spikes in the winter when heating is required, but it also rises again in summer months when there is an increase in electrical usage, particularly in the USA, due to air conditioning usage.

Gasoline is also a seasonal market, but it contrasts significantly from the heating oil and natural gas seasons. During the winter when heating oil demand rises, gasoline demand tends to fall. The cold weather tends to discourage people from making long car journeys, therefore needing less petrol.

However, in the summer, when heating oil demand falls, gasoline demand increases due to increased car usage. This inverse correlation is one that all energies traders should be aware of.

Heating oil and gasoline will all be influenced in price by supply and demand factors affecting crude oil. If OPEC announced a production cut, this would mean less crude oil would be available to distill into heating oil or gasoline.

For this reason, distillate prices closely follow crude oil prices and if you are trading distillates you should also be aware of factors which will affect oil prices.

Gasoline tends to be the most expensive of the distilled energies as not only does it cost more to distill and produce but it also has the highest global demand.

Key Reports

As traders, the most important supply and demand data for heating oil and gasoline are released alongside crude oil data every Wednesday in the DOE inventories. This is a major market-moving economic release as it reveals the stockpiles of crude oil, and also other distillate energies.

In a similar fashion to oil, any increase in stockpiles for heating oil or gasoline would lead to a fall in market prices as it indicates a reduction in consumption or an increase in supply. However, a decrease in stockpiles should lead to a rise in prices as it will indicate higher usage or lower supply.

The key supply and demand data for natural gas comes from weekly DOE Natural Gas Storage Reports, released every Thursday. This details the net change in storage levels of natural gas, and this is broken down into three regions – Eastern/Mid-Western areas (the key consumers), the South (which are the main producers), and the West.

  • Gasoline and heating oil are by-products of crude oil, formed in the distillation process.
  • Natural gas is not a by-product of crude oil but is commonly found alongside oil reserves.
  • Both natural gas and distillates are seasonal markets and they are closely correlated to crude oil prices. As such prices will be influenced by supply and demand factors influencing crude oil prices.
  • There is a close correlation amongst all distillate prices as the more demand that there is for one distillate, the less supply there will be for others.
  • The key fundamental releases are the weekly DOE inventory figures on Wednesdays and Thursdays which reveals stockpile levels for the distillates and separately for natural gas.
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