Understanding Margin Account in Oil Futures Trading

What will happen to your margin account if the oil price decreases to $86 per barrel?

If the oil price decreases to $86 per barrel, the loss on your margin account will be $4,000. However, this loss does not exceed the maintenance margin requirement of $7,000 per contract. Therefore, your margin account will not be affected.

Understanding Margin Account in Oil Futures Trading

When trading oil futures, it is important to understand how margin accounts work. In this scenario, you entered into one long oil futures contract with a futures price of $90 per barrel. Each contract covers 1,000 barrels of crude oil. The initial margin requirement is $10,000 and the maintenance margin requirement is $7,000 per contract.

Calculating the Loss on Margin Account

When the oil price decreases to $86 per barrel, here's what will happen to your margin account:

1. Calculate the loss: To determine the loss, subtract the new futures price ($86 per barrel) from the initial futures price ($90 per barrel). Loss = $90 - $86 = $4 per barrel.
2. Calculate the total loss: Since each contract covers 1,000 barrels of crude oil, multiply the loss per barrel by 1,000 to find the total loss. Total Loss = $4 per barrel * 1,000 barrels = $4,000.
3. Check if the loss exceeds the maintenance margin requirement: Compare the total loss to the maintenance margin requirement of $7,000 per contract. Since the total loss of $4,000 is less than the maintenance margin requirement, your margin account will not be affected.

Conclusion

When the oil price decreases, the value of your futures contract decreases as well. In this case, the total loss on your margin account due to the decrease in oil price will be $4,000, which is within the maintenance margin requirement. Therefore, your margin account will not be affected in this scenario.