How to Start Day Trading Crude Oil

The price of crude oil is not only determined by the fundamental outlook for the physical commodity and global supply and demand, but also by the determined actions of traders. The price of crude is constantly fluctuating, and day traders use that movement to make money.

Day trading crude oil is about speculating on short-term price movements, rather than attempting to assess the "real" value of crude. By using a combination of long and short positions, day traders can turn a profit whether the price of crude is rising or falling.

Traders do this without ever physically handling crude oil. Instead, all of the trading transactions take place electronically, and only profits or losses are reflected in the trading account. The two most common securities used to achieve this goal are futures contracts and exchange-traded funds (ETFs). Here's how day traders do it.

Futures Markets

A futures contract is an agreement to buy or sell something—like crude oil, gold, or wheat—at a future date for a set price. Of course, day traders don't actually want to buy those products. Day traders, by definition, close out all contracts each day. They make a profit or loss on each trade based on the difference between the price at which they bought or sold the contract and the price at which they later sold or bought it to close out the trade.

In the U.S., crude oil futures trade through CME Group's NYMEX exchange in New York. Several types of crude oil can be traded, and each has its own contract. Two of the most commonly traded crude oil contracts are the Crude Oil Futures Contract (CL), which represents 1,000 barrels of oil, and the E-mini Crude Oil Futures Contract (QM), which represents 500 barrels of oil.

On an exchange, the CL price fluctuates in $0.01 increments and the E-mini contracts fluctuate in $0.025 increments. These increments are called "ticks." A tick is the smallest price movement a futures contract can make. When you buy or sell a futures contract, you measure your profit or loss by counting ticks.

Crude Oil Futures Contract (CL)

For the standard crude oil contract, the tick value is $10. That's because each contract represents 1,000 barrels of oil, and the tick for each barrel is measured in increments of $0.01. If you have a position on one contract, a one-tick movement will result in a profit or loss of $10. If the price moves 10 ticks, you gain or lose $100. If it moves 10 ticks and you're trading three contracts, your profit or loss is $300.

E-Mini Crude Oil Futures Contract (QM)

Using the same formula, the tick value for an E-mini crude oil contract is $12.50 ($0.025 per tick per barrel and 500 barrels per contract). That means for each contract, a one-tick movement will result in a profit or loss of $12.50. If it moves 10 ticks, you gain or lose $125. If it moves 10 ticks and you are holding three contracts, your profit or loss is $375.

Minimum Futures Trading Amounts

The amount of capital you need in your account to day trade a crude oil futures contract depends on your futures broker, but you can expect a minimum of around $1,000. Keep in mind that you will also need enough money in the account to accommodate for potential losses. If you decide you don't want to risk more than 1% of your capital on any single trade, then you could only risk $10 per trade.

If you don't close out all of your positions before the end of the trading day, you may be subject to initial margin and maintenance margin requirements. When you trade on margin, your entire account is collateral. If you fail to swiftly deposit the cash to meet those margin requirements, your brokerage could sell your assets at its discretion.

Day Trading Crude ETFs

Another way to day trade crude is through a fund that trades on a stock exchange, such as the United States Oil Fund (USO). Beginners may find this strategy more accessible since they can trade price movements in crude oil through the stock trading account they likely already have. The values of crude oil ETFs reflect daily percentage price changes.

However, while you can day trade single shares, ETFs (like stocks) are typically traded in 100-share blocks called lots. If the price moves a penny, and you're holding 100 shares, you make or lose $1. Options contracts typically cover at least 100 shares of the underlying security, so options traders can't trade single shares.

Minimum ETF Trading Amounts

U.S. law mandates that "pattern day traders" for stocks and ETFs maintain margin account balances of at least $25,000. Anyone who opens and closes a position on the same day at least four times a week is considered a pattern day trader. Individual brokerages may impose their own requirements beyond that, but you must have at least $25,000 to start day trading in earnest.

Beyond that requirement, the amount of capital you need to day trade a crude oil ETF depends on the price of the ETF, your position size, and whether you're trading with leverage (using borrowed money).

Trading Crude Oil, a Volatile Market

Remember that oil can also be a volatile market. In April 2020, the oil market saw record lows. As a point of reference, the oil ETF USO traded for roughly $4.66 on April 14, 2020. Two weeks later, at the close of business on April 28, 2020, USO underwent a 1-for-8 reverse stock split, which increased the net asset value per share and decreased the number shares outstanding. At market close on May 1, 2020, USO closed at a price of $18.86 per share.

With oil demand down, it is unlikely that funds will return to prices that they were in 2019 by the end of 2020, so use caution and consider all of the risks before investing in oil or any industry-specific fund for that matter.