PrintCrude oil is the first energy commodity we will discuss. Its symbol is CL. We refer to this as West Texas Intermediate or WTI crude. It is low sulfur, and so, therefore, is given the nickname sweet crude. The NYMEX contract for crude oil was initiated in 1983. Every contract represents 1,000 barrels, which is the equivalent of 42,000 gallons of oil. Price quotes on the New York Mercantile Exchange are all US dollars and cents, in this case per barrel. A minimum price fluctuation-- that is, the amount that the price has to move for a trade to take place-- is a penny, or $10 a barrel.
The delivery point for crude oil under this contract is what's known as FOB, or free on board, or delivered to the seller's facilities at Cushing, Oklahoma and to any pipeline or storage facility with access to Cushing Storage, TEPPCO, or Equilon pipelines. So if you buy or sell crude oil contracts on NYMEX for a particular month, you are obligated to either receive the crude oil or deliver the crude oil at Cushing, Oklahoma.
Deliveries are to be made uniformly across the month. This is the contractual obligation. The idea here is to make all parties deliver as equally as possible. For instance, if I sold 30 contracts for the month of September, that means 30,000 barrels of crude oil-- the Exchange would like me to deliver that at 1,000 barrels a day. However, if I cannot, my real legal obligation is 30,000 barrels for the month.
The trading hours on NYMEX for what we consider to be the open outcry or pit trading, the general session where the traders are in the pits yelling orders back to one another, run from 9:00 AM to 2:30 PM Eastern Standard Time. The Chicago Mercantile Exchange also has an electronic trading platform known as Globex, and this is virtually 24 hours a day, seven days a week. It starts at 6:00 PM on Sunday evenings and ends at 5:45 PM on Friday, Eastern Time. -- why is this paragraph here? It seems to just be thrown in there randomly. Can this be moved to another page or explained why it is mentioned here?
Crude oil can be traded for up to nine years. And then we also have products that are known as strips. These are available for terms of 2 to 30 consecutive months. In essence, strips amount to an average price. If I wanted to buy six months worth of crude, rather than go out and have my broker quote me one month's price at a time, they'll just give me an average price across the six months. Therefore, I am purchasing a six-month strip of crude oil.
Is this talking about the last trading day of the month? Could we say,
Every future contract expires on the last trading day of the month. The last trading day of the moth is three (3) business days prior to the 25th of the month. In the event the 25th is a non-trading day, The last trading day, every contract expires. Again, we are talking about future contracts. So currently, the closest future contract is September. The crude oil contract, then, settles three business days prior to the 25th of the month. So just in case the 25th is a non-trading day, either a weekend day or a holiday, the settlement occurs three business days prior to the business day that is prior to the business day ahead of the 25th. I know that sounds very confusing. I can't quite figure it out myself half the time.
Margin requirements is a big issue. You can see that if you want to buy or sell crude oil contracts. For every single contract that you wish to enter into, you have to have $5,100 (I believe this amount changes - based on what? Can you say on Sept 30, 2016, the price required margin requirement was $####. You can find the current margin requirement at xyz (add link)) in a margin account. That's a safety net against losses that you could incur. This protects your clearing broker and protects the New York Mercantile Exchange from default by you as a counterparty.
This also discourages a lot of traders from just jumping in and trying to trade contracts. For example, if a trader wanted to speculate on 10 crude oil contracts-- that's only 10,000 barrels-- that's not a lot of volume, per se. They would have to put $51,000 in a margin account before they could even get started.
Crude Oil Futures Contract Symbols
Here is the symbol breakdown. When you look at futures screens, or if you see the prices reported in the Wall Street Journal or any other type of publication, you'll see these funny symbols. The first two letters of the symbol represent the energy commodity themselves. So CL represents crude oil. The second letter is the actual month of delivery. For example, U equals September. The final symbol is the number that corresponds to the year. In our example, 2. So the September 2012 contract for crude oil on the NYMEX is expressed as CLU2.
Other symbols that represent energy commodities-- NG for natural gas, HO for heating oil. RBOB represents unleaded gasoline, and then PN for propane. And then here's the breakdown of the symbols for the months that they use. Feel free to use this as a cheat sheet if you ever run across those quotes and can't remember what they mean.
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Crude Oil Futures: Contract Screen Labels
When you look at futures screens, you're going to see column headers that will use these types of terms. When you see the “Open”, that's the opening price at the opening bell. When you see people on television ringing the bell for the open of whatever market it might be-- the stock market, the NYMEX, the Chicago Mercantile Exchange-- as soon as the bell goes off, the very first trade that is consummated, that price is registered as the “open” for the day.
The “High” is the highest price that traded that day, including the after-hours electronic trading. The “Low” is the lowest price that traded for that day, including after-hours electronic trading. That gives us the range on the day-- what was the entire range of pricing that day.
When you see “Last”, that's the last trade that just occurred. In other words, what was the last trade that had occurred? The “Net” would be the change in price from that last trade to the one prior to it. So are we going up or are we going down as we're trading currently? The “Change” is the change in price from the trade that just occurred, from that last trade, versus the prior day's settlement. What was the final price for the energy commodity the day before, and where do we sit relative to that today? That's what change represents.
Zero Sum Game
We refer to futures contract trading as a zero-sum game. For every buyer, there is a seller. I can't buy crude oil contracts without someone being willing to sell them to me, nor can I sell them without a market. And believe it or not, less than 2% of all the contracts traded actually go to physical delivery. In other words, less than 2% of the contracts will actually be energy commodities exchanged between counterparties. Now, on the one hand, that may sound like a small number, but with each crude oil contract representing 1,000 barrels, and you can trade between 50,000 and 100,000 contracts a day, it does amount to a substantial amount of physical energy commodities being exchanged.
Crude Oil Futures Contract Screen Labels