Crude oil is one of the most traded commodities throughout the world. It is an important energy resource with a constantly rising popularity. Crude oil is used as a raw material to derive various products like plastics, gasoline, vaseline, medicines, wax, and more. It affects every country’s development somehow, which is why everyone keeps a close eye on its prices.
What is oil trading?
Oil trading represents buying and selling oil CFD, oil futures, oil indexes, and international oil assets to earn an income. Oil is a finite and important world resource that affects world industry development. Traders like to trade oil because it is a volatile commodity that fluctuates due to supply and demand changes.
The fluctuations in the price of crude oil create wonderful opportunities for traders throughout the world. But, how can you take advantage of these fluctuations for your benefit? How can you be a part of the global market where the trading of crude oil takes place? And most importantly, how do you begin to trade crude oil?
What is oil trading at today?
What are the trading hours for crude oil?
For majority brokers, trading time for crude oil CFD, crude oil spot, and futures is from Sunday at 5 pm EST (22 GMT) till Friday 5 pm EST (22 GMT) during winter. The crude oil market closes on Friday at 4 pm EST (21 GMT) and opens on Sunday at 4 pm EST (21 GMT) during summer. The oil market is open for trading 23 hours a day, 5 days a week.
Let’s understand what crude oil essentially is and what makes it so important.
Unrefined fossil fuel and petroleum are what we call crude oil. It is the raw material that we extract directly from the earth and is unprocessed. When diatoms (dead remains of plants and animals) buried deep into the earth decompose due to heat and pressure, crude oil is formed. This process takes millions of years, which is why crude oil is labeled as a non-renewable commodity. Crude oil is composed of organic materials and hydrocarbon deposits. In its raw form, crude oil is not useful. It is refined to produce products that are useful and valuable. These products are diesel, fertilizers, medicines, gasoline, petrochemicals, and more.
The International Energy Agency (IEA) declared that globally, we consume approximately 93 million oil barrels every day. This makes oil one of the critical and basic blocks of the global economy. Unlike other popular commodities like gold, oil has the capacity to affect every person’s life daily. Not solely from the trader’s point of view, it has become one of the necessities. Everyone from a businessman, trader, economist, and a common man keeps an eye on its prices.
When it comes to trading, investors and traders use crude oil as a tool. They speculate the market sentiment, look for investment, diversification, and hedging opportunities with its help. Some traders use its volatility not only to make a profit but to leverage geopolitical issues as well.
What are WTI and Brent crude oil?
WTI refers to West Texas Intermediate crude oil that originates from U.S. oil fields. The original Brent Crude oil referred to a trading classification of sweet light crude oil first extracted from the North Sea’s Brent oil field in 1976.
WTI Crude Oil
What is Crude Oil?
Crude oil represents a naturally, fossil, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Crude oil can be refined to produce usable products such as gasoline, diesel, and various other petrochemicals. The most famous types of crude oils are WTI Crude Oil and Brent Crude Oil.
West Texas Intermediate or the WTI is considered a benchmark for oil trading on MT4 and MT5 trading platforms. The other popular option is Brent Crude. These two are the two most popular ones.
The WTI is also known as US Crude. It is regarded so highly because of its premium quality. It is exported globally. WTI is used throughout the world. It is sweet and light in nature. It is refined in the USA and generally priced higher than its contemporary, Brent Crude, by $1-$2.
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As an oil benchmark, it is used to reference crude oil prices for sellers and buyers. It is the price of WTI that is quoted as the oil price in the media.
What is Brent crude oil?
Brent Crude oil represents sweet light crude oil first extracted for the first time from the North Sea’s Brent oil field in 1976. It can be primarily found in the Nort Sea, Europe, and North Africa. Brent is an acronym for Broom, Rannoch, Etive, Ness, and Tarbert – the five geological formations that form the Middle Jurassic field. The Brent Crude oil marker is also known as Brent Blend, London Brent, and Brent petroleum, and it is described as light because of its relatively low density and sweet because of its low sulfur content.
North Sea Brent Crude or the Brent Crude is the next best oil to the WTI. Like the WTI, Brent Crude is also regarded as the benchmark against which other oil prices are compared.
While the WTI is extracted and refined in the United States of America, Brent Crude’s source is the North Sea, and its refining is done in Northwest Europe.
Interesting Oil facts
How many us gallons in a barrel of crude oil?
In a barrel of crude oil, there are 42 gallons. Petroleum refineries in the United States produce about 19 to 20 gallons of motor gasoline and 11 to 12 gallons of ultra-low sulfur distillate fuel oil from one 42-gallon barrel of crude oil.
Can the US export crude oil?
Yes, the United States export crude oil. In 2019, the United States exported crude oil to about 190 countries. U.S. total crude oil exports were 3 MMb/d, equal to about 35% of total petroleum exports.
How many crude oil refineries are in the US? There were 135 operating refineries in the US, distributed among 30 states during 2020. year.
How much crude oil is produced in the US?
In the United States, about 2.83 billion barrels (or about 7.76 million barrels per day) of crude oil were produced directly from tight oil resources during 2019. year. In the year 2020, production was disproportionately lower because of the pandemic situation.
Everything About the OPEC Basket
The next in line after the WTI and Brent Crude is the OPEC. The Organization of Petroleum-Exporting Countries or the OPEC is also a major global market factor for crude oil.
Unlike the WTI and Brent Crude, the OPEC does not belong to any particular place. Crude oil from seven different places together makes the OPEC oil. These seven places are Saudi Arabia, Algeria, Venezuela, Mexican Isthmus, Nigeria, Dubai, and Indonesia. OPEC oil is dark in color and comparatively less sweet than the WTI and Brent oil. It is cheaper than the other two oils but still plays a crucial role in the global market.
Brent crude vs. WTI
The difference between Brent crude and WTI crude oil is that WTI originates from U.S. oil fields, and Brent Crude originates from oil fields in the North Sea. Usually, WTI is slightly “sweeter,” “lighter,” and lower in price than Brent.
WTI Vs. Brent in detail
While both the crude oil types are hailed as the top two in the market, there are a few differences between the two that you must know if you are considering trading crude oil CFDs. The five main differences are:
- Extraction Location: In terms of extraction, it is safe to say the WTI belongs to the US because it is majorly extracted from North Dakota, Louisiana, and Texas. Brent Crude is the WTI’s European counterpart. It is extracted from the North Sea, located around Denmark, Germany, Belgium, Great Britain, Norway, France, and the Netherlands.
- Geopolitical Difference: In Forex, we see that the political activities directly or indirectly impact its respective currency value. The same applies to oil prices as well. These political activities can sharply influence the trading activities and the price of oil of that country. Since seven different regions contribute OPEC oil, geopolitical influence is more prominent there.
- Composition and Content: Like any other product or commodity, the oil price is also directly proportional to its quality. When we compare the quality of WTI and Brent, we mainly consider API gravity. API gravity or the American Petroleum Institute gravity measures the heaviness of oil compared to sulfur and water content. The sulfur content of WTI is 0.24%, while that of Brent is 0.37%. Lower sulfur makes oil sweeter. It is easy to refine the sweeter oil. This is why WTI is usually more expensive than Brent.
- Oil Trading Options: You can trade WTI and Brent as CFDs and futures contracts. While CFDs can be made available by the same broker, futures contracts for both the oils are managed by different exchanges. New York Mercantile Exchange manages WTI, and the Intercontinental Exchange manages Brent Crude.
- Prices: In theory, quality should determine the price of oil. Since WTI offers superior quality compared to Brent, it is usually a dollar or two more expensive. This, however, does not always hold. In addition to the quality, there are a lot of other factors that influence oil prices. The balance between demand and supply can also be a deciding factor.
Factors That Affect Oil Prices
Factors affecting crude oil prices are:
- Demand (Economic growth can drive up the demand for crude oil)
- OPEC regulation (Organisation of Petroleum Exporting Countries, is a cartel made up of 14 countries that export petroleum).
- Natural disasters, war, and geopolitical instability
- Strength of the US dollar
- Market sentiment (overall attitude of oil investors toward an oil financial market)
- Key reports that affect crude oil prices in the short term
Any movement in oil prices affects the world at large. Investors, traders, entire economies, and even a common man is concerned with oil price movements. This is because even a slight change in crude oil price can directly or indirectly affect consumer goods’ prices. The higher the price of the oil, the more expensive the goods will be and vice versa.
When these prices change, they make some long-term impact, like:
- When the prices rise, economic growth can get undermined. This is because products become more expensive in this case. Therefore, there are chances that the economy will see a rise in the rate of interest or inflation.
- When the prices rise, economic growth gets stimulated. This is because products become cheaper in this case. This reduces the chances of any hike in the rate of interest or potential inflation.
- The above two points show that lower oil prices are better for the economy, but they should not go down a certain price point. If they go below that, supply will get affected as producers will halt oil-based projects.
The prices of oil are never stagnant. They can change by the day and even by the minute. Numerous factors affect the prices, and the most substantial ones are as follows:
- When oil producers disturb the demand-supply equilibrium.
- When the demand-supply equilibrium gets disturbed by importers and oil users.
- The total subsidies received by oil and other energy companies.
- International agreements signed by governments of different countries.
- Oil producers and their internal politics.
- Growth and development of other energy sources.
- Geopolitical tension tends to make traders insecure.
- Fundamental usage of oil.
You might have noticed that we have related demand and supply several times to oil prices. Do you know why? Like other consumer goods that tend to rate higher when the supply is less and demand is low, oil prices, too, behave similarly. With an increase in demand, the prices also rise, and vice versa. But what affects the demand and supply of oil. Many factors can do it; the two main factors are – the level of oil production and the health of an economy. Let’s discuss the two.
The Level of Oil Production
How much oil is produced has a direct impact on the supply. To understand this, we need to highlight where oil is found. Out of 195 countries in the world, only 100 countries produce oil. We can say that almost 50% of the world’s total countries are dependent on other countries for this source of energy. Secondly, out of these 100 countries, 49.6% of the total crude oil is produced by five countries. We can see that crude oil is concentrated in five major geographical areas. This gives these oil-producing countries can manipulate the supply and distribution of crude oil. To a major extent, they are in control of the price as well.
If the supply is more and the prices fall, they can slow or stop the production to prevent prices from falling further. Once the demand is on the rise again and the consumers are willing to pay a good price, they can increase oil production.
Global Economic Health
The demand for crude oil derivatives like gasoline and plastics is referred to as direct oil consumption. However, its indirect consumption is also prominent. When the demand for goods increases in the economy, there will be expenditure on transportation. This will increase the oil demand. The demand for goods increases when the global economy is in good health. Companies will export and import goods, subsequently increasing the oil demand.
Effect of Geopolitics on Oil Prices
Five main countries produce almost 50% of the world’s crude oil. Read more about these countries, and you will see that these are often considered important or powerful nations. They hold power to stop or slow oil supply to other nations. A halt in the supply of crude oil has a noticeable negative impact on an economy’s health. In case there is any conflict in any of these five oil-producing regions or war-like situations are created, this could make producers and traders insecure. Producers and inventory keepers start hoarding oil for any unforeseen crisis, driving oil prices higher.
If you are planning to invest in or trade crude oil, it would be better to test the global air and read about the political and economic state.
Advantages of Trading Oil
Oil is a popular asset that is traded all over the world. Unlike Forex and crypto, most countries do not impose restrictions on their trade. There are many advantages to trading oil. Some are given below:
Volatility refers to the scale of price movements of an asset. Higher volatility can make an asset riskier, but there is no scope for making any profit without it. Oil prices see large price movements. The up and down movement in the oil prices is substantial, making trading Brent and WTI exciting for many traders. You can leverage these price movements and make a substantial profit.
Traders are always advised against investing their entire capital in one asset or security. Many people in countries like the UK, Australia, and the US invest in properties because real-estate is a flourishing sector there. In other countries, people invest in stocks, shares, and more. The idea behind diversification is to protect your investment against the possible downfall of the market. While a sudden dip is unlikely, one can never be too sure. Diversification allows traders to reduce the risk involved in trading.
Investing in crude oil will also allow you to diversify your portfolio and manage risk.
3. Trade the Fundamentals
Like Forex, crude volatility is also influenced by fundamental changes in the five main oil-producing countries. If you are someone who has always struggled with technical analysis, trading crude oil will be good for you. The geopolitical situation of a country heavily influences oil prices. By keeping a close eye on the news, you can predict in which direction the prices will move.
How to Invest and Trade Crude Oil
Unlike most other instruments, oil trading doesn’t have to be completely virtual. There are many ways in which you can trade or invest in this asset. You can purchase crude oil barrels, stocks, trade oil futures, CFDs, and more. You can even invest in oil ETFs. Let’s explore these options:
1. Direct Purchase of Crude Oil
In theory, the most straightforward way to make a profit using crude oil would be to buy a barrel at a lower price and then sell it later when the prices are higher. However, it is not that simple. Unlike precious metals like gold and silver, you cannot buy oil barrels in small quantities. Secondly, crude oil is highly toxic. You need a proper set-up to store it. In most countries, you cannot keep oil barrels without insurance. This makes purchasing oil barrels a tedious task.
Thankfully, there are other ways in which you can trade crude oil.
2. Oil Stocks
There are many companies involved in oil production, refinement, and exploration. Instead of buying oil barrels, invest in the stocks of these companies. BP. Exxon Mobil, Total SA, and Royal Dutch Shell are some of the global companies.
The only downside or conflicting thing with investing in oil stocks is that oil prices change does not directly reflect these companies’ shares. This is because of many factors, including the fact that you are not investing in crude oil directly. When you invest in shares, you invest in its entire value and not just its end products. Many variables affect the company’s value, which is unrelated to the final product, crude oil in this case.
How to buy WTI crude oil stock?
To buy WTI, crude oil stock traders need to track and analyze companies involved in oil production, refinement, and exploration, such as Chevron, ExxonMobil, W&T Offshore Inc., etc. ExxonMobil oil producer company is also one of the world’s largest companies by revenue, with $244.3 billion.
3. Trading Oil Futures
Trading oil futures represents trading oil contracts in which traders agree to exchange an amount of oil at a set price on a set date. Oil futures are an active, liquid, and volatile market that enables traders to trade rising and falling oil prices, reflecting the demand for different oil types.
Both Brent and WTI can be traded with the help of a common trading option. A future contract world differently than shares and stocks. It is a legal agreement where parties agree to buy or sell a particular asset at a specified later date and a determined price before the trade begins. Futures contracts are directly impacted by any change in oil prices but remove the oil barrels’ obligation.
4. Oil ETFs
Exchange-Traded Funds or ETFs also offer a good oil trading option. A bundle of assets like stocks makes an ETF, which is an asset in itself. With the help of ETFs, traders get the opportunity to trade or invest in a larger market. This is because an ETF represents several instruments and not just one.
For example, if an investor is looking forward to investing in tech stocks, but they haven’t done extensive research on which stocks to invest in, they can simply look for a tech stock ETF. This ETF represents different tech stocks, and the investor is not expected to research anymore.
In addition to stock ETFs, there are commodity ETFs as well. You can easily find crude oil ETFs that might include stocks of crude oil belonging to different companies.
Trading ETFs is similar to trading shares. You pay a fixed price when you buy an ETF and sell it later when the prices have increased. The difference between the buying and the selling prices will be your profit or loss. You can also trade via CFDs, which are derivatives of ETFs. These allow you to trade in either direction.
5. Oil CFDs
If you are wondering how to trade oil CFDs, we have got you covered. The contract for difference or a CFD is a tool that you can use to trade price changes. It eliminates the need for physically possessing an asset. Through a crude oil CFD, you can make a profit on price fluctuations without buying any barrel.
- Even without purchasing a barrel of crude oil, you can begin trading by:
- Creating a trading account with a broker that offers CFD trading options.
- Installing the trading platform offered by your broker on your phone or computer
- Using a demo account for practicing and then depositing funds in your live account for live trading
- Using the same platform to open and close different trades.
Trading oil CFD is very popular and rightly so. It offers several benefits like:
- Traders are not obligated to buy oil barrels. This is one of the biggest problems as you have to purchase a minimum of 1000 barrels.
- If you are trading oil CFDs, you get the opportunity to open both long and short positions. This means that you can take advantage of price movements in both directions.
- You can easily execute short-term trades. You don’t have to wait for days, weeks, or months. These trades can be executed within seconds.
- CFDs can be leveraged. This means that you can operate a sum larger than your actual investment. For example, if your broker is offering you the leverage of 1:20, it means that for every dollar that you add into your account, you can operate $20 in the marker. This allows traders to make more profits even with limited investments.
- You can trade smaller contracts using CFDs. This paves the way for small investors as well to take advantage of crude oil volatility.
- You can trade CFDs completely virtually. You can do it for 5 days every week and 24 hours a day.
Examples of Trading CFDs
To have a better understanding of how to trade oil CFDs, consider the following example. You will learn all about the investment required and the potential profit/loss.
- First, you need to understand the size of your trade.
- You need to understand the difference between the two types of prices: the opening and closing prices.
- Finally, check if there are additional trading costs involved.
Once you know about the above three things, trading will be easier for you. Talking about the first point, the trade size is measured in lots when we are considering CFDs. A lot is the standard contract that is related to the underlying asset. In both Brent and WTI crude oil, a single lot comprises 100 barrels. So, if one barrel of the WTI crude oil is priced at $56, the entire single lot will cost you $5,600.
According to your calculations, if WTI crude oil price will rise, you will buy lots and open a long trade position. On the contrary, if the prices are believed to witness a downfall, you will sell the lot and open a short trade position.
Let’s assume that you are opening a buy trade position (long position) for WTI at $56/barrel. The prices later rise to $59/barrel. Here, the difference between the opening price and the closing price is $3. If you decide to close your position at this point, an entire lot of WTI CFDs will fetch you a profit of $300 ($3 x 100 barrels). The more lots you invest in, the more money you will earn.
Before you get excited, you should know that you will not get the entire $300 in most cases. In the case of CFDs, some additional fees will be charged by the broker. There are mainly three categories:
- And, commissions
It is the difference between the buying and the selling prices of an asset. Your buying prices will always be higher than the selling prices by a small margin. Do not confuse the selling price with the $59/barrel that we mentioned above. It is the price at which your broker will buy back the CFDs. If you decide to sell a lot immediately after buying it, you will definitely suffer a loss.
The difference between the buying and the selling price of a lot. It can take away from your profit if you are buying more lots or making larger trades. Basically, a spread is a fee or commission charged by the broker. Therefore, it is important to look for brokers that offer tighter spreads.
Let’s assume that your broker charges $0.03 on every spread. The total spread cost on one lot will be $3 ($0.03 x 100 barrels). This will be subtracted from your gross profit, making your final profit to be $297.
A swap is an interest rate adjustment. This fee is charged when you hold an overnight position. In some cases, if you are holding a short position, you might receive interest. This is not a fixed charge.
In addition to spreads, some brokers also charge a commission. Some brokers might only charge commission and not any fee on spreads. This commission can either be decided in percentage or dollars. There is also a minimum commission that is charged.
Oil CFDs vs. Futures
Only a few people buy physical barrels of crude oil. Investing in CFDs and futures is the most popular way of crude oil trading. While neither of the options gives you ownership of the asset, and you can go both long and short with these two options, there are still many differences between these two favored choices, some of them are based on the following:
Expiration Date: Futures come with monthly or quarterly expiry dates, but CFDs can go on forever if you keep renewing them.
Trade: You can trade futures via exchanges like CME, CBOT, and NYMEX. You need a counterparty for trading CFDs.
Strategies for Crude Oil Trading
The first thing that you need to do is to find a broker. Once that is done, you are required to form a beneficial strategy. Your strategy must include proper risk management. The goal is to use the volatility offered by crude oil to maximize profits. You can split most of the trading strategies into different time frames and styles.
Here is a brief on how you can trade CFDs on oil, based on different styles and time frames:
1. Based on Trading Styles
- You can base your strategy on fundamental analysis. As we told earlier, crude oil trading strategies take more from fundamental analysis rather than technical analysis because geopolitical conditions play a huge role in it. You should collect data from news channels, government websites, and statements released by the governments of at least 5 major oil-producing countries.
- One cannot completely disregard technical analysis. You must read price charts via indicators and candlesticks and deduce them into usable information. This information will help you in locating entries and exits along. You can also check if a particular CFD is suitable for long-term investment or not.
- The next method is called wave analysis. This method promotes the analysis of price patterns highlighted by charts to understand the market structure, context and check if a CFD offers good trading opportunities.
2. Time Frames
- Long-term traders use daily or weekly charts.
- Middle time frames suit swing traders. It could be anywhere between 4 hours to a day.
- Intra-week traders use Mid-low charts that cover one to 4 hours.
- Intra-day traders prefer lower time frames. They set their charts to cover 15 to 60 minutes.
- Scalpers use very low charts that cover no more than 5 minutes.
How to Combine Different Time-Frames for Trading Oil
You can apply permutation and combination when it comes to combining different time frames. However, there are a few combinations that are favored by a majority of crude oil traders. These are the most preferred methods:
Long-Term Time Frame and Fundamental Analysis:
When looking for changes based on fundamentals, you might want to consider setting up a long-term time frame because these changes are not quick. You require less time to set up this combination. It is always better to use a long-term forecast with fundamentals.
Short-Term Time Frame and Fundamental Analysis:
When traders use news events and data released by the government for fundamental analysis, they are looking for short-term gains as compared to long-term gains explained in the above point. For quick and short trades, it is better to set a shorter time frame.
Medium and Long-Term Time Frame and Wave Analysis:
Wave patterns are successful when you are using a 1 hour or higher chart. If you are just starting with wave analysis, it would be more plausible to use a 4 hour or higher chart. This is because it takes time to understand how wave analysis works. It is easier to understand its dynamics on a comparatively higher time chart. You can start with 4 hours and gradually move to even a 15-minute graph.
Medium-Term Time Frame and Technical Analysis:
You can easily use technical analysis for long-term trading. Many traders use a higher time frame with it, but it is more efficient with a medium-term time frame as it can tell you about profitable entry and exit points.
Short-Term Time Frame and Technical Analysis:
Scalpers are always looking for quick results. They use indicators that can make calculations without human input. Since they make trades quickly, they need to keep an eye on every second’s price movements. Therefore, a short time frame will suit them.
Combination of All the Time Frames:
One grand approach is not to limit your time frame. Many traders prefer combining all three methods not to limit their time frame. There are a few benefits to this approach, but it is definitely not for beginners, and it can leave you in ‘paralysis of analysis.’
Crude oil trading is prevalent and, if done with a good strategy, advantageous. You must ensure that the combinations of methods that you are employing are complementary. Make sure that you are sure about your primary form of analysis. Yes, you will be doing both fundamental and technical analysis, but you must know which one will your first choice. Then, choose a time frame according to that.
You must also think about risk management. There are several filters and tools that you can use for it. These will tell you about profitable entry and exit points. These tools also include stop-loss, which is a great risk management tool. If you are ever unsure, do not proceed. Talk to a broker or an expert.