When it comes to oil trading, traders are likely familiar with the term “USOIL”. As its name suggests, USOIL refers to United States Oil, specifically the collective term for West Texas Intermediate (WTI) crude oil. In Forex trading, USOIL commonly serves as a trading symbol for CFDs based on WTI crude oil.
This article aims to explore USOIL in CFDs and forex trading, delving into the specifications of WTI CFDs and explaining how US oil trading works through CFDs. Throughout this article, you’ll discover:
- How to trade USOIL in forex and CFD platforms.
- The contract size, leverage, margin calculations for USOIL
- How to start trading WTI crude oil with minimal capital.
1. What is USOIL – USOIL in Forex Trading
USOIL also symbolised as “WTI”, is a Contract for Differences (CFDs) derived from the Chicago Mercantile Exchange’s (CME) WTI crude oil futures.
As most of the WTI crude oil traded through the futures trading and established as the benchmark price for WTI crude oil, the price of the USOIL (WTI CFD) is quoted based on the near-month contract price of the CME’s WTI Crude oil futures.
The CFD trading in WTI crude oil has become increasingly popular among individual investors in recent years. This popularity stems from its highly flexible trading conditions, especially its ability to enable traders to participate in oil price volatility without the necessity of holding any underlying WTI assets, such as WTI futures contract or WTI spot.
2. The Differences: USOIL vs WTI Futures
The WTI crude oil serves as a global benchmark for oil prices, traded significantly through futures contracts with high volumes. But why do individual investors prefer WTI CFD trading instead?
To understand this, let’s briefly understand the distinctions between WTI CFDs and WTI Futures:
| WTI Crude Oil Futures | Allow contract holders to deliver crude oil at a predetermined price and quantity in the future; Primarily serving oil producers, refineries, and traders for trading and hedging purposes. |
| WTI Crude Oil Futures (e-Mini and Micro) | Enable investors to trade WTI crude oil prices and hedge without the need for physical delivery. The contracts are cash-settlement upon contract expiry. |
| WTI CFD (USOIL) | Allow investors to trade the WTI price volatility with high flexibility without require to hold any WTI underlying asset. |
3. Advantages of Trading USOIL
When comparing WTI CFDs to futures, while the Chicago Mercantile Exchange’s WTI crude oil futures see significant trading activity, individual investors seeking exposure in US oil trading might find USOIL CFDs more appealing due to their flexibility and trading conditions.
Table below, we’ll briefly compare the trading conditions of USOIL and WTI futures.
| WTI CFD (USOIL) | WTI Futures (CL) | WTI E-Mini Futures (QM) |
|
|---|---|---|---|
| Contract Value | Quote Price x 100 | Quote Price x 1,000 | Quote Price x 500 |
| Minimal Lot | 0.1 Lot | 1 Lot | 1 Lot |
| Leverage | 100-200x | Approx. 10x | Approx. 10x |
| Contract Expiry | No Expiry | Monthly | Monthly |
| Settlement | No | Physical Delivery | Cash Settlement |
| Min. Margin | As low as $7 | Min. $2,500 | Min. $1,250 |
The margin required for crude oil futures will change based on the expiry date of the futures contract, with contracts closer to expiry require higher margin amounts.
3.1 Ultra-Low Requirement for USOIL
USOIL offers individual investors significantly lower thresholds in contract value, minimum trading lots, margin requirements, and leverage compared to WTI crude oil futures. Looking just at the margin requirement, trading USOIL require less than 1/100th of what’s needed for WTI Crude Oil Futures.
Calculation based on the WTI crude oil price of $73 per barrel, the margin for trading USOIL is as below:
1 lot of “USOIL” margin = $73 x 100 / 100 leverage = $73
Furthermore, USOIL allows a minimum trade of 0.1 lots, meaning trading USOIL can start with as little as $7.3.
Different brokers offer varying contract values, minimum lots, and leverage. Overall, the contract specifications for trading USOIL CFDs on forex trading platforms are quite similar across the board.
3.2 No Physical Delivery or Cash Settlement Required
WTI crude oil futures contracts settle every month, requiring traders looking to roll over positions to close out before expiry and re-establish on a new contract. Otherwise, contract holders face either physical delivery or cash settlement.
In contrast, WTI CFD have no expiration or settlement dates. Traders can hold positions indefinitely without any rollover or settlement procedures.
4. USOIL CFD Contract Specification
After understanding the basics of USOIL, traders looking to trade WTI crude oil must next familiarize themselves with the contract specifics of USOIL on the trading platform. Different brokers may have varying designs in their contract spec, so traders must grasp the following points before commencing trading USOIL:
4.1 USOIL Contract Value
USOIL’s contract specifications vary across different brokers in terms of contract sizes and the minimum tradable lots. For most brokers, the size of a USOIL contract is:
One USOIL contract value = WTI crude oil quote x 100 barrels
Assuming the WTI crude oil quote is $75 per barrel, the value of one USOIL contract would be $73 x 100 = $7,300. Additionally, many brokers also offer trading at a minimum of 0.1 lots, meaning the contract value for 0.1 lots would be $730.
4.2 USOIL Margin and Leverage
Next comes the leverage and margin for USOIL. Leverage determines the minimum margin required to trade USOIL, and different CFD brokers offer varying leverage ratios, usually ranging from 100 to 200 times.
Suppose a broker offers a leverage of 100 times, using the same contract value calculation:
Margin for 1 lot of US30 = Contract value ÷ Leverage = 32,800 / 200 = 164 USD.
Margin required for one USOIL lot: $7,300 / 100 leverage = $73
For a trade of 0.1 lots, the required margin would only be $7.3, allowing for exposure to fluctuations in WTI crude oil prices.
4.3 USOIL Trading Spread and Costs
Spread refers to the difference between the buying and selling prices, essentially the cost of trading USOIL. As shown below, the buying price for USOIL is 74.952, and the selling price is 74.922, resulting in a spread of 0.030 (or 30 points). It’s worth noting that some brokers quote three decimal places, while others use two decimal places.
How is the spread cost calculated? In a long trade, the opening price depends on the buying price (74.952), while the closing price depends on the selling price (74.922), and vice versa.
Suppose we open a long position by buying one USOIL contract (buying at 74.952) and immediately close it (selling at 74.922):
The spread is the cost of trading US30, representing the difference between the buying and selling prices. In the given quote, the spread for US30 is 1.25 points. If we go long 1 lot of US30 at this spread and assume no change in the quote before immediately closing the position, this trade would result in a loss of 1.25 USD.
74.922 – 74.952 = -0.03 * 100 contracts = -$3.00
This trade incurs a spread cost of -$3.00, which represents the cost of trading USOIL.
4.4 USOIL Market Hours
The trading hours for USOIL (WTI CFDs) are generally similar to the trading hours of WTI crude oil futures on the Chicago Mercantile Exchange, but there might be slight differences depending on the broker or trading platform. Overall, WTI CFD offer close to 24-hour trading for five days a week:
| USOIL Trading Hour | ||
|---|---|---|
5. Trading Scenario - USOIL
Below, we’ll explain how to trade the WTI crude oil prices through an example involving USOIL:
Trading Background
Assuming the WTI crude oil price is at $75 per barrel, and we predict that the WTI crude oil price is likely to rise to $85. Therefore, we can engage in a long trade using USOIL.
Opening Position
Initial capital: $1000
Account leverage: 100x
Lot Size (Long Trade): 1 lot (100 barrels)
Opening quote: $75.00/$75.25
Entry price: $75.25
Margin requirement: $75.25
Account leverage: 100x
Lot Size (Long Trade): 1 lot (100 barrels)
Opening quote: $75.00/$75.25
Entry price: $75.25
Margin requirement: $75.25
After opening the position, due to the cost of the spread, the trade immediately incurs a loss of $25. Hence, the account balance becomes $975 ($1000 – $25). Among this, $75.25 is tied up as the trading margin, leaving $899.75 as available margin, which can be used to cover losses or open new positions before closing the trade.
Profit Calculation
Suppose after opening the long position, the USOIL price rises as expected to $80 per barrel, and the trade is closed at $80 per barrel.
Profit = ($85 – $75.25) x 100 = $975
Loss Calculation
Suppose after opening the long position, the USOIL price doesn’t rise as anticipated but falls to $72. At this point, we decide to close the trade with a stop-loss at $72.
Loss = ($72 – $75.25) x 100 = $325