For most traders, the simplest way to trade Oil is through CFDs. Oil CFD trading is deemed a less costly option as CFD contracts are minimal compared to Oil futures contracts. That means Oil CFDs are easy on the margins. Furthermore, in a CFD trade, there’s no need to “roll” (or extend) a contract.
If you trade Oil CFDs rather than Oil futures, you can still use Oil futures data to make an informed decision. Then, you get the best of both worlds, i.e. the low costs of CFDs and the insight of Oil futures (usually WTI contracts).
Watch Oil Futures Volume
The first insight that Oil futures data can give you when trading Oil CFDs is volume. Since oil CFDs are OTC (Over-the-Counter) there is no volume available. By using the CME website you can view the volume of the front month contract in WTI. With that data, you can conclude how strong the momentum of a recent Oil trend. If you get high volume, then momentum is strong and, of course, vice versa.
Source: CME
Winter is Coming
Oil demand tends to jump during winter months; that, of course, is because demand for heating amplifies the need for energy. But what does it means in practice, as a trader? Say you opened an Oil trade, either long or short, ahead of winter. Demand expectations could change the trend once winter began. How could Oil futures help you?
Once again, the CME site can come to your rescue. Let’s say you’re in August and the Oil futures contracts for November are much higher. You realize that there’s a greater likelihood that Oil will head higher over the coming weeks. Now, what if the price is more or less the same as the Oil CFD contract? That means there is a low expectation of rising Oil for the upcoming winter.
As seen in the sample below (from the CME WTI oil contracts) December and January are roughly at the same price of $46.41 for Oil WTI contracts. And that means low winter expectations.
There is one caveat; only watch the winter months’ futures when winter is really approaching. Otherwise, the price may not be that indicative.
Source: CME
Watch Open Interest Ahead of Inventories
If you trade forex then you know all about the monthly Nonfarm Payrolls report and how it affects the major FX pairs. Well, Oil has its own “Nonfarms,” albeit in miniature. Every Wednesday, the Energy Information Administration (EIA) releases its weekly petroleum status and inventories report.
Data on future and options (where the big money is) can come in very handy. Any open buy side interest ahead of the EIA release is quite revealing. That suggests that any fall in inventories could ignite a bullish bounce. So every Wednesday, you get an indication of a potentially big move and adjust your trade accordingly.
Source: CME
Spot Reliable Pivots
Sure, open interest can help you sense sentiment but there’s more. It can also allow you to spot pivots. How? Think of it; all of the big Oil producers have a certain price below which they will lose money. When you examine the Oil open interest chart, this time from options, you can easily identify that price by a high concentration of puts. Those puts option are in place to protect producers against an Oil collapse. Then you can rely on those pivots during your day trade or when swing trading.
Source : CME
Oil CFDs vs Futures
Of course, there are many more nuances to trading Oil CFDs which can be addressed another time. For now, though, understand that Oil CFDs are the smart way to trade Oil. Having said that, however, it doesn’t mean you can’t gain valuable insight from the derivatives market.