How to Trade Crude Oil: WTI, Brent, OPEC and Inventories

Crude oil is the world's most heavily traded physical commodity and one of the most active markets for short-term traders. It is also one of the more complicated, because there is no single oil price. There are several benchmarks, each tied to a particular grade and location, and most traded contracts are futures with expiry dates rather than a simple spot price.

WTI and Brent

West Texas Intermediate (WTI) is a light, low-sulphur grade. The WTI futures contract traded on CME Group's NYMEX exchange is physically delivered at Cushing, Oklahoma, an inland storage hub where several pipelines meet. One contract is 1,000 barrels. Because it is delivered inland, WTI reflects US supply and pipeline logistics closely.

Brent is the reference for crude produced in the North Sea, and the ICE Brent futures contract also covers 1,000 barrels. Unlike WTI it is not tied to delivery at a single storage tank. The contract settles by delivery through an exchange for physical or in cash against the ICE Brent Index, which is built from North Sea market activity. Brent is waterborne crude that can be shipped anywhere, which is one reason it has become the benchmark that much of the world prices against. ICE, which runs the Brent futures market, says as much as two thirds of the world's traded oil is priced relative to the Brent complex.

The two usually move together, and the gap between them (the Brent-WTI spread) changes with US export capacity, transport costs and regional supply. A trader choosing between them should know which one a platform quotes, because the price levels, trading hours and expiry dates differ.

What moves the price

OPEC and OPEC+

OPEC is a group of oil-producing countries that coordinates output policy. Since the Declaration of Cooperation in December 2016, which entered into force on 1 January 2017, a group of non-member producers led by Russia has joined it in coordinating output, and the combined group is commonly called OPEC+. Its meetings on production targets are scheduled and widely watched. Announced cuts can lift prices, and announced increases can push them down. Compliance varies, and markets weigh what members actually produce against what they say.

Demand and the economy

Oil demand follows industrial activity, transport and travel. Weakening growth data, particularly from the United States and China, tends to weigh on prices, and a strong dollar can too, because oil is priced in dollars. Leading indicators such as manufacturing surveys are therefore relevant, and are covered in leading macro indicators.

Supply and geopolitics

US shale output, pipeline outages, refinery problems, hurricanes in the Gulf of Mexico, sanctions and conflict in producing regions all alter expected supply. News of this kind often arrives without warning, so prices can gap.

The weekly inventory report

The US Energy Information Administration (EIA) publishes its Weekly Petroleum Status Report on Wednesdays, with the main tables released at 10:30 a.m. Eastern time. In some weeks that include public holidays the release is delayed by a day, so check the EIA's published schedule. The report covers US crude oil stocks, including the Cushing hub, along with gasoline and distillate stocks, refinery utilisation, imports, exports and implied demand.

What moves the market is the surprise against expectations, not the figure itself. Analysts publish forecasts for the weekly change in crude stocks, and a larger-than-expected draw (stocks falling) is usually read as supportive, while a larger-than-expected build is usually read as bearish. An industry estimate from the American Petroleum Institute is often released the evening before, so some of the move can come early. The reaction is frequently sharp for a few minutes and then reverses, as other details in the report get read. Spreads widen in that window, which matters if you hold a position through it. The economic calendar article explains how to plan around scheduled releases.

Futures curves: contango and backwardation

Each oil futures contract is for delivery in a specific month, and the prices of different months form a curve. When later months cost more than the front month, the market is in contango. This often reflects ample supply and the cost of storing oil. When later months cost less than the front month, the market is in backwardation, which often signals tight near-term supply.

This matters because a futures contract expires, so a position kept for long must be rolled into the next contract. Most CFD providers quote oil using a futures contract, and when the front contract nears expiry they switch the quote to the next one. Providers handle this differently. A common method is that the quote jumps to the new contract's price and the provider applies a cash adjustment to your account so that the switch itself does not create a profit or loss. Others fold the cost into financing or spreads. Read the product terms for the specific instrument.

The last line is the point. If the curve stays in contango, the long position keeps paying the roll cost, and the price of the CFD can drift down relative to the spot price even when the headline price looks flat. In backwardation the effect reverses, and a long position can benefit from rolling. This is a feature of futures-based exposure, and it is a reason oil held for weeks does not behave like oil held for a day.

April 2020: when the price went below zero

On 20 April 2020 the May WTI futures contract settled at -37.63 dollars per barrel, the first time a major front-month oil contract settled below zero. The CFTC's interim staff report describes the contract falling from about 17.73 dollars at the previous settlement. The May contract was due to expire the next day, 21 April.

The reasons were mechanical. Demand had collapsed in the first wave of Covid-19 lockdowns, storage at Cushing and elsewhere was filling, and a physically delivered contract obliges a holder at expiry to take barrels at Cushing. Holders without storage or a buyer had to close their positions, and sellers outnumbered buyers. Later contracts, such as June, stayed above zero throughout. The negative price applied to the expiring contract only.

Several lessons follow. A futures price is a price for delivery on a date, not a price that cannot fall below zero. Positions near expiry carry delivery-driven risk that mid-curve positions do not. Brokers' handling of negative prices differed, so it is worth knowing how your provider treats negative prices and what it does to a stop or a margin call. A stop order gives no protection if the market gaps through it, and the risk of rapid loss is greater when an instrument is in a tight, one-way market.

A worked trade

Assume a WTI CFD where one lot is 100 barrels, so a one-dollar move is worth 100 dollars. A trader buys at 70.00 with a stop at 68.50 and a target at 73.00. Figures are invented.

If the trader holds through the Wednesday inventory release, the stop may fill below 68.50 if the price gaps, so the loss can exceed the 150 dollars planned. Many traders avoid holding through that window or reduce the size beforehand. Sizing rules are in where to place stop-loss and take-profit orders.

Trading an oil CFD is not owning barrels or a futures contract. It is a contract with a broker that follows a futures price, and the roll, financing and spread charges apply to it. Leveraged positions can lose money quickly, and oil is volatile enough that moves of several percent in a day are not unusual.

Sources: CME Group (WTI futures specifications and rulebook), ICE Futures Europe (Brent futures specifications), U.S. Energy Information Administration (Weekly Petroleum Status Report and release schedule), OPEC (Declaration of Cooperation), U.S. CFTC (interim staff report on the May 2020 WTI contract). Next in the series: Fundamental vs Technical Analysis: How to Screen and Pick Stocks