Summary: This blog covers the basics of crude oil trading along with the types of crude oil. Moreover, you will learn about some crude oil trading strategies and the factors affecting crude oil prices. In the later section, you will also find out how you can trade crude oil online.
Crude oil is one of the most frequently traded commodities worldwide. It is often known as “black gold” and “the mother of all commodities,” it’s an important resource primarily extracted from the Middle East. Crude oil supports many industries that play an important role in the production of everything starting from plastics and petroleum to cosmetics, cars, and pharmaceuticals.
Trading crude oil can be risky because of the increased volatility in recent years. Oil prices are always moving due to the fluctuating supply and demand. Despite this, crude oil is a very liquid commodity, making it possible to trade in large volumes with a relatively narrow average spread of about 3.0 points. If you want to learn more about trading crude oil online, keep reading.
Types of Crude Oil
Crude oil comes in different types depending on where it is found and its unique characteristics. Two main types, Brent and West Texas Intermediate (WTI), are used as benchmarks for oil prices globally.
- Brent Crude Oil: Brent oil comes from 15 oil fields in the North Sea. It is known as “light and sweet” oil, although it is not as light or sweet as WTI. Around two-thirds of the world’s oil contracts are traded on Brent.
- WTI Crude Oil: West Texas Intermediate is sourced from oil fields in Texas, Louisiana, and North Dakota. It is called ‘light sweet crude oil’ because of its low density and low sulfur content, making it less expensive to produce and easier to refine compared to heavier, sourer oils. WTI is the main benchmark for oil used in the United States.
Why Crude Oil is considered a valuable commodity?
Crude oil is considered a highly valuable commodity as it can be processed into vital products like gasoline, diesel, and several petrochemicals, all of which are in continuous demand. Being the main source of energy worldwide, crude oil plays an important role in our daily lives. The increasing population and rise in consumption of agricultural and recreational goods cause an increase in energy demand. This puts notable pressure on both supply and demand.
What affects Oil Trading prices?
Oil prices can move significantly and are tailored by numerous factors, which contain supply, demand, and market sentiment. In the UK, several key elements impact crude oil trading prices:
- Natural disasters, wars, and civil unrest
- Seasonal variations in demand
- Population growth
- Global economic trends
- Availability of shipping and changes in freight rates
- Development of another fuel and the increasing demand for renewable energy
How to Trade Crude Oil Online?
You can trade in crude oil through different methods designed for both long-term and short-term techniques. Whether you are interested in directly purchasing and selling oil or predicting its price fluctuations through a trading platform, there are various ways to get included in the oil market:
Crude oil spread betting
Spread betting is a popular way to trade on the changing prices of oil, including Crude Oil Brent and West Texas Intermediate (WTI). This type of trading is leveraged, so you only need to deposit a portion of the full trade value to open a position. As a trader, you won’t own the actual oil, but you can guess about its price movements.
Crude oil spread betting can be risky because the commodities market can be very changeable, especially during economic crises or instability. To get started, you can use our spread betting demo account with virtual funds before moving on to a live account.
Oil CFDs
Contracts for difference (CFDs) are financial tools that operate similarly to spread betting, allowing you to speculate on the movements of crude oil prices. You can initiate a position based on whether you anticipate the price will rise or fall. The main difference between CFDs and spread betting lies in their tax treatment. Remember that the tax consequences are dependent on your specific circumstances and may differ, particularly if you are located outside the UK, and tax regulations are subject to change.
How to trade Crude Oil Futures?
The most common way to trade crude oil is done through futures contracts, also called forwards. These contracts have rules like agreeing to purchase or sell a particular amount of oil at a fixed price on a future date. This technique is popular in the commodities markets as oil prices are volatile.
Rather than buying oil at its present spot price, storing it, and expecting its value will rise, futures contracts let you forecast its future value at the contract’s expiration. This method allows you to trade on changes in prices without physically owning the oil. However, trading oil futures has its risks, because the prices have movements based on several factors affecting the oil market.
Oil ETFs
Another way to trade in oil is through ETFs or exchange-traded funds. These funds help traders gain exposure to the oil market. This happens by possessing shares in a range of oil companies.
Crude oil ETFs are traded just like regular stocks. When oil prices increase or decrease, it affects the stock rates of oil companies. This in turn influences the value of the ETF.
Trading oil stocks in the long term is considered challenging because of the constant movements in oil prices. Many traders favor short-term techniques, such as day trading, which align with the daily changes in oil rates. This also makes it easy to find trends and forecast future movements.
Similar to spread betting and CFD trading, oil ETFs include the shares traded in the market. The trader doesn’t have ownership of the underlying assets. Remember, that leveraged ETFs are tricky and risky financial tools, and they’re generally suitable for seasoned traders.
Crude Oil Trading Strategies
When choosing a trading product, you’ll find that certain strategies work better with the commodities market. For instance, day trading oil is a common strategy that focuses on capitalizing on short-term price changes.
As we’ve mentioned before, oil prices can vary frequently. Even though this commodity generally has a low spread and relatively stable market, it’s still possible to profit from minor price shifts.
Day trading crude oil, along with other techniques like news trading and scalping, demands a high level of technical analysis and a deep understanding of price charts, as these methods can be quite risky.
Which analysis is used in Crude Oil Trading?
Crude oil is one of the most active commodity trading out there. This means it is purchased and sold in large numbers. There’s a huge data available for analysis. To get a good handle on the oil market and make informed results, traders need to do some research, including both technical and fundamental analysis. This helps in grasping market trends and understanding the asset better.
For instance, fundamental analysis helps assess the true value of oil by looking at things like company financial reports, news about oil trading, and the economic health of the region where trading occurs. If there’s news about an oil spill or a production cut, it can impact oil prices and the companies involved, so these factors need to be included in your trading strategy.
On the other hand, technical analysis involves studying price charts, graphs, and other technical indicators to glean numerical insights, and this usually comes after the initial fundamental analysis.
In summary, both approaches are crucial for trading oil effectively, given its potential for high volatility. Combining both strategies provides a more well-rounded perspective.
How to Start Crude Oil Trading?
The crude oil can be traded online in the following ways:
1. Know the basics
- Learn what is crude oil.
- Influence in price by market factors: The prices of crude oil is affected by factors like global supply and demand, geopolitical events, economic indicators, and OPEC decisions.
- Trading Product: The main tools for trading are futures, CFDs (Contracts for Difference), and ETFs (Exchange-Traded Funds).
2. Broker Selection
- Research: It is essential to find a respectable broker online with good track records of performance low fees and an easy-to-navigate website.
- Regulations: The broker must be regulated by some financial body to ensure that money is safe.
- Trading Platform: It should have good platform features along with fast charting tools and order execution.
3. Opening an Account
- Information Required: Usually, you will have to provide personal details, proof of identity, and an address.
- Fund Deposit: You will need to deposit money into your trading account to get started.
4. Learn to Use the Platform
- Know how to place an order, how to place a stop-loss order, and take a profit order by analyzing the chart.
- Practice through a demo account: Using a demo account, one can practice trading without risking real money.
5. Develop a Trading Strategy
- Manage Risk: Set your stop-loss orders to limit the potential losses.
- Technical Analysis: Study charts and indicators, thus picking out the places that would give the best reason for entering a trading move based on price patterns and trends.
- Fundamental Analysis: Explain macroeconomic factors, including global economic conditions geopolitical events, and supply and demand forces.
6. Trading
- Entering Orders: Having identified an opportunity to trade, enter your order
- Monitoring Positions: Track market movements and adjust your positions as the situation allows.
Conclusion
In conclusion, the nature of the high liquidity and volatility of crude oil makes it more favorable for traders. Creating robust crude oil trading techniques based on market analysis can lead to successful results. Moreover, discovering different oil trading platforms and usage of their educational resources can help you enhance your skills and boost your trading game.