Categorized | Fundamentals, Inventories, Technicals

Crude Oil Futures Rollover

Posted on 09 April 2015 by admin

Crude Oil Futures Rollover

 

One of the most important things to bear in mind while trading futures is futures rollover.

The contracts between the buyer and the seller, for any derivatives of financial instruments,were created to deliver or receive the goods in a certain month.

Primary, the futures exchanges were established for farmers to protect their crops. Therefore the fundamental explanation to this method is based on the needs of the farmers to be able to sell their product on the crops months.

Futures rollover occurs when we switch thecontract that expires on the current month, to a contract that expires in a future month. Rollover for futures trading can occur quarterly or monthly. To use CME rollover expiration calendar: http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_product_calendar_futures.html

 

Crude Oil futures rollover exist in a form of monthly contracts, which means every month there is a rollover of the current month to the next month.

WTI and Brent crude oil have different expiration regulations:

WTI(Light Sweet Crude Oil) – WTI is trading at CME. The last trading day in the current month contract would be on the third business day prior to the 25thof the calendar month of the contract that is to be delivered. In case the 25th of the month is not a business day, the last trading day would be the third business day prior to the last business day preceding the 25th calendar day. For example, if the 25th is a Sunday then this would be counted from Monday as the last trading day would be Wednesday for the current month contract.

Brent Crude Oil – Brent is trading at ICE. The last trading day of the current contract would be on the last business day of the second month preceding the relevant contract. For example, the last trading day for March contract would be the last day of January.

Find more information on ICE website: https://www.theice.com/products/219/Brent-Crude-Futures

 

The prices of crude oil futures contracts are different for every calendar month. Crude Oil futures are performing in a Contango, which is a situation where people are willing to pay more for a future contract than the actual current price of the commodity. This phenomenon happens due to storage costs. It is important to follow the open interest positions that published on the exchanges websites before the rollover occurs.

 

Another thing that must be taken into account is that Crude Oil futures deliver physically. That means that if you do not close the position before rollover date, you are obligated to collect the goods from the delivery location that has been agreed on in the contract.

 

For a day trader, rollover is a significant factor to consider while trading. A trader must match his trading strategy to the contract that he/she would like to trade. Usually, the current month contract would have the highest volume of contracts and perhaps become volatile than the other contracts. The far contracts could be less liquid but contain a lot of potential and opportunities.

It’s also essential to be aware when the major weekly inventory reports will occur, and what the estimates are.  Our favorite economic calendar for traders is the WorldEconomicCalendar.com

WorldEconomicCalendar.com

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