What are energy futures?

Energy futures are contracts that allow traders to buy or sell specific energy commodities, such as crude oil, natural gas, or gasoline. These contracts are based on the value of the underlying physical commodity. Investors use energy futures to speculate on the future direction of energy markets or to hedge against price fluctuations in those commodities.

These futures are standardized and traded on exchanges like the Chicago Mercantile Exchange (CME). Like other futures contracts, energy futures have standardized terms, including expiration dates and contract sizes. When trading energy futures, you're not actually purchasing the physical commodity but speculating on whether prices will rise or fall.

When their forecasts are correct, traders can profit from both upward and downward price movements by going long or short the contract. However, traders risk losing money when they go long and prices fall or if they go short and prices move higher.

Energy futures are also popular among businesses and investors looking to hedge against price volatility in the energy sector. For example, an airline could buy crude oil futures to lock in fuel prices and protect against rising costs. However, factors like market timing, position sizing, and costs are key considerations for those using energy futures as a hedging strategy.

Example

Among the various types of oil futures, the CME Group West Texas Intermediate (WTI) Crude Oil futures (/CL) are some of the most actively traded, known for their standardization, global acceptance, and liquidity. Each /CL contract represents 1,000 barrels of oil. For example, if crude oil is trading at $50 per barrel, the value of one /CL contract would be $50,000. Contracts have monthly expirations.

To buy or sell a /CL contract, traders must put down a percentage of the total value, called the margin requirement. Margin requirements can fluctuate but typically represent a small portion of the contract’s total value (e.g., $5,000). The futures trade in $0.01 increments, so the smallest price movement (or tick size) equals $10 (1,000 barrels x $0.01). Trading occurs from Sunday to Friday, 5 pm to 4 pm CT, with a one-hour break at 4 pm daily.

Energy futures can be used for both hedging and speculation. Businesses and investors use them to hedge against price fluctuations in energy markets, while traders often use these contracts to speculate on price movements in commodities such as crude oil, natural gas, or gasoline.

• Speculation: Traders speculate on future market direction by buying futures if they expect prices to rise and selling if they anticipate a decline. This allows them to profit from market swings in the energy sector.
• Hedging: Commercial businesses use energy futures to mitigate the risk of price fluctuations. For example, airlines or manufacturers buy futures to lock in stable prices for oil or natural gas, protecting against rising costs. On the other hand, energy producers sell futures to secure a fixed price for their products, shielding them from potential price drops. This strategy helps both consumers and producers manage volatility and stabilize their expenses or revenues.

The CME Group offers standard energy futures on key commodities like crude oil, natural gas, and gasoline. These contracts are highly liquid, making it easier for traders to enter and exit positions. Like other futures, standard energy contracts provide leverage, allowing traders to control large positions with relatively little capital. However, this leverage can amplify both gains and losses.

The CME Group also offers micro energy futures, which are smaller versions of the standard contracts and typically 1/10th the size. These micro contracts are more accessible for traders with lower risk tolerance or those looking to trade smaller sizes. Micro energy futures allow for more precise risk management, enabling traders to adjust their positions more granularly, and offer a lower-risk way for new traders to gain experience in energy futures without committing significant capital.

WTI Crude Oil futures (/CL) track the price of West Texas Intermediate (WTI) crude oil, a key benchmark for U.S. oil prices. WTI crude oil is one of the most actively traded commodities in the world, with its price serving as a reference for the U.S. oil market. These futures are widely used by traders and companies in the energy sector to hedge against price fluctuations in crude oil.

WTI Crude Oil futures are sized at 1,000 barrels of crude oil. For example, if crude oil is priced at $80 per barrel, the value of one WTI futures contract would be $80,000 (1,000 x $80). The minimum price fluctuation, or tick size, for WTI Crude Oil futures is $0.01 per barrel, which equates to $10 per contract (1,000 x $0.01). Like other commodity futures, WTI Crude Oil futures trade nearly 24 hours a day, Sunday through Friday, allowing traders to react to global events and market changes.

Micro WTI Crude Oil futures (/MCL) are a smaller version of the standard WTI Crude Oil futures contract, offering more accessibility for individual investors and smaller traders. Micro Crude Oil futures are sized at 100 barrels of crude oil, making them 1/10th the size of the larger contract. For example, if crude oil is priced at $80 per barrel, the value of one Micro Crude Oil contract would be $8,000 (100 x $80). The minimum price fluctuation, or tick size, is also $0.01 per barrel, which equates to $1 per contract (100 x $0.01). Like the standard contract, Micro Crude Oil futures trade nearly 24 hours a day, 5 days a week.

Natural Gas futures (/NG) track the price of natural gas, a key energy commodity used for heating, electricity generation, and industrial purposes. Natural gas prices are influenced by factors such as supply and demand, weather patterns, and geopolitical events. These futures are widely used by energy companies and traders to hedge against price volatility in the natural gas market.

Natural Gas futures are sized at 10,000 million British thermal units (MMBtu) of natural gas. For example, if natural gas is priced at $3 per MMBtu, the value of one Natural Gas futures contract would be $30,000 (10,000 x $3). The minimum price fluctuation, or tick size, for /NG futures is $0.001 per MMBtu, which equates to $10 per contract (10,000 x $0.001). Like other energy futures, Natural Gas futures trade nearly 24 hours a day, 5 days a week, giving traders flexibility to respond to market movements and global events.

Micro Natural Gas futures (/MNG) are a smaller version of the standard Natural Gas futures contract, designed to provide a lower-cost entry point for individual investors and smaller traders. Micro Natural Gas futures are sized at 1,000 MMBtu of natural gas, making them 1/10th the size of the standard contract. For example, if natural gas is priced at $3 per MMBtu, the value of one Micro Natural Gas futures contract would be $3,000 (1,000 x $3). The minimum price fluctuation, or tick size, is $0.001 per MMBtu, which equates to $1.00 per contract (1,000 x $0.001). Like the standard contract, Micro Natural Gas futures also trade nearly 24 hours a day, 5 days a week.

Gasoline futures (/RB) track the price of refined gasoline, which is widely used for transportation and is a key component of energy markets. These futures are often used by refiners, distributors, and traders to hedge against price fluctuations in the gasoline market, which can be influenced by factors like crude oil prices, refining capacity, and seasonal demand. They’re sized at 42,000 gallons of gasoline, which is equivalent to 1,000 barrels. For example, if gasoline is priced at $2.50 per gallon, the value of one contract would be $105,000 (42,000 x $2.50). The minimum price fluctuation, or tick size is $0.0001 per gallon, which equates to $4.20 per contract (42,000 x $0.0001). Gasoline futures trade nearly 24 hours a day, Sunday through Friday, giving traders the flexibility to respond to market shifts and global news events.

Energy futures, including those for crude oil, natural gas, and gasoline, serve as essential tools for managing risk and speculating in global energy markets. These standardized agreements allow participants to lock in prices for the future, providing stability for businesses dependent on energy commodities while offering investors the chance to profit from price fluctuations. Energy futures are crucial for maintaining liquidity, transparency, and risk management in the energy sector, attracting a diverse range of participants—from producers and consumers to financial institutions and retail traders.