Crude Oil


1. What is it?

By June 2013, BM&F started trading with crude oil futures, with contracts firstly based on the CME Group (Chicago Mercantile Exchange). The object for the contract is the WTI barrel, meaning the light sweet crude oil. For the time being, BM&F only deals with mini WTI contracts, with representes the equivalent to 100 crude oil barrels.

Trading always take place in barrels. Each of them has about 159 liters of oil, with prices changing in US dollars with two decimal places. The minimal lot (1 contract) is equal to 1,000 barrels within CME’s traditional market. However, BM&F keeps offering only mini contracts, equal to 100 barrels. There is no physical delivery for crude oil futures in Brazil, but that can happen at CME’s stock exchange.

Crude oil futures have been created to hedging oil prices for a particular date in the future, offering protection to players that need the commodity and also to oil producers. Almost every single industrial sector uses the oil at some stage, which includes all derivates, like plastics and polymers, for instance.

Let’s say oil producers want to assure a minimum price level for the barrel. Barrel prices are totally attached to demand/offer effects. The larger is the volume offered by producers, the lower tends to be the price and vice-versa. Thus, oil giants need to make sure WTI prices will be in a level sufficient to cover their costs and provide some profits. Airlines, on the other hand, need fuels that derivate from oil to keep their fleets flying. As the equivalent oil volume for supplying that huge demand of fuels can pass through price increases, airlines use to buy WTI futures in order to directly compensate more expensive fuels in the long term, reducing their exposure to the energy sector.

WTI future market prices change as physical market moves, accordingly, floating with demand and supply balance. At the crude oil traditional market, at CME’s, liquidation usually happens using average prices. For instance, if a contract lasts three months, liquidation takes place by the expiration date for the moving average of daily WTI prices for those three months.

Most traded crude oil assets include the Crude WTI (West Texas Intermediate), traded in NY and the “Brent” oil traded in London. Difference between them is that the WTI is lighter and extracted from the Mexican Gulf, so it can be easily refined and further processed, hence its higher prices. The Brent, a bit more dense, is extracted either from the North Sea and the Middle East, and stands as a reference for the European markets

2. Characteristics


Crude oil futures terminology is found from the following factors:

1. Crude oil futures trading code is “WTI”.

2. The letter corresponds to the expiry month, as follows:

Month Letter
January F
February G
March H
April J
May K
June M
July N
August Q
September U
October V
November X
December Z

*International Standards

3. Expiry year.

Example: for dealing with a crude oil contract expiring by October 2014, we have the following code:

WTI V 14


WTI futures have the following characteristics:

Trading code WTI
Trading unit 100 barrels (1 contract)
Quotation US Dollars per barrel
Minimal daily change US$ 0.01 per barrel
Max daily change US$ 10.00 per barrel
Standard Lot 1 Contract
Limits 3,000 contracts per expiring month
Trading schedule 9am – 4pm (Regular trading)
Last trading day Contract’s expiry date

Day trade

It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of WTI futures. The settlement of day trades is performed automatically on the first business day following the date of closing of the business.

Daily Settlements

The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.

For WTI contracts, the daily adjustment happens the day after the deal, or D+1. However, on the expiry date only, updates are made in the same day, or D+0.

Guaranty Margin

It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.

The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.

Operational costs

Costs from trading WTI futures are:

Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa.

Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:

Emoluments: The fees charged by the BMF values ​​related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. On WTI futures contracts, the fees are charged according to the following table:

Number of contracts Charge
From To US$
1 n 0,52

Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For WTI contract it reaches USD1.30 per contract.

Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.

Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded.

Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.

The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.

Currently, registration charges for WTI futures are estimated as follows:

Number of contracts Registration charge
From To US$
1 n 0,78


Expiration dates for WTI futures can be set up for any month in the year. The expiration date as well as the last trading
session happen by the last work day of the expiry month.


By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held. It is possible the investor exit the position before the maturity date, only by performing a counter that it is positioned operation. If it is bought in oil futures contracts, just only sell these contracts. If sold, just buy, always in the same amount.

3. Profitability and risks

Making profits from investing in WTI futures is something that depends directly on changes at the crude oil spot markets. Such change can be motivated by a serie of factors, peaks of demand or supply for a period, or the other way round. If the investor buys a WTI contract and prices drop, he loses money, which equally happens when he sells a contract and prices go up thereafter.

WTI futures are widely used as hedging tool, for protecting prices from floats that can be affecting both producers and companies that demand these kind of raw materials. WTIs are extremely volatile, with prices floating fast. That results in a preference from investors who want to deal with high liquidity and leveraging.

4. Taxation

Taxes over WTI futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.

For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.

All costs and fees paid for investing can be deduced from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the subsequential months, as long as the operations are similar.

The payment of taxes is the responsibility of the investor himself, except when the tax is direct at source and must be calculated and paid monthly on the last business day of the month subsequent to the determination. The calculation is performed over the term of the contract and not monthly.

5. Example

Let’s take an airline as an example, which uses about 1.6 million liters of fuels per month. The company’s president believe fuel prices are to hike up, and decides on a hedge operation, looking for guaranteeing future oil prices in line with the current quotations. While doing that, he earns if barrel prices increase.

As the company’s needs of fuels reach 1.6M liters, and a barrel contains about 159 liters of oil, the recommended operation size is 100 contracts overall, as follows:

Number of contracts = 1,600,000 liters (fuel needs) / 159 (each barrel’s capacity) = 100,062.89 barrels.

Each WTI mini contract is equivalent to 100 barrels, so we have:

100,062.89 barrels / 100 (WTI mini contract size) = 100.62 contracts, or 100 contracts rounding it down.

Consider the following facts:

Required fuels (Liters) 1.600.000
Contract Size 100
Price per barrel  US$ 94,00
Contract Buying 100
Start Date September
Expiration October

As days go by, we have the following changes (daily settlements):

Date Adjusted Prices Daily Settlements
D+0 US$ 94,00 0,00
D+1 US$ 93,80 -2.000,00
D+2 US$ 94,43 6.300,00
D+3 US$ 95,41 9.800,00
D+4 US$ 95,93 5.200,00
D+5 US$ 96,64 7.100,00
D+30 (Maturity) US$ 97,32 6.800,00
Total 33.200,00

D+0: in the first day, 100 contracts are purchased at a price of US$ 94,00 per barrel.

D+1: future prices change, and are traded at US$ 93.80. Thus, the daily change is accounted having the previous day as reference (US$ 93.80 – US$ 94.00) and multiplied by the number and size of the contracts held (100 * 100 = 10,000). As prices drop and the holder is long in WTI futures, then we have an adjustment of minus US$ 2,000.00 in the operation.

D+2: a positive adjustment happens to US$ 94.43. (US$ 94.43 – US$ 93.80) * (100 * 100) = US$ 6,300.00.

D+3: a new positive change with oil prices hiking. (US$ 95.41 – US$ 94.43) * (100 * 100) = US$ 9,800.00.

D+4: another positive adjustment with new price increases. (US$ 95.93 – US$ 95.41 ) * (100 * 100) = US$ 5,200.00.

D+5: yet another hike and positive change. (US$ 96.64 – US$ 95.93) * (100 * 100) = US$ 7,100.00.

Adjustment will be happening in a daily basis until the contract expires, and just by then we can say whether the adjusts generated profits or losses. If crude oil prices reach US$ 97.32, then we are going to have:

1. Barrels are purchased at target spot prices, that means a value of US$ 97,32, which means expenses of US$ 973,200,00 (100 contracts).

2. Profits reach US$ 33,200.00 for the forward operation (sum of all positives and negatives daily settlements through maturity date).

3. Company’s total expenses reached US$ 940,000.00, considering the target buying prices minus the profits made (US$ 973,200.00 – 33,200.00). So that just works as though the company has purchased the crude oil for US$ 94.00 rather than current spot prices of US$ 97.32.

*Taxes and transaction costs have been disconsidered for the example.

6. Advantages

  • The top advantage for WTI contracts is to hedge positions against crude oil price changes, giving producers and consumers a better way of balancing their cash flow.
  • Possibilities of speculation on price changes. If the  investor thinks prices will drop, he can sell his positions even before paying anything, just by using the initial margins, and making profits or paying for losses in a daily basis.

7. Disadvantages

  • Daily updates;
  • Guaranty margin;
  • Income taxes;
  • Expiry dates, so you cannot undefinedly carry up positions, needing to postpone to a new expiry date if necessary;
  • High risk as variable income investment.

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