In a recent article, we showed how oil trading works. But let us start from the beginning.
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 gasoline, diesel, and various other petrochemicals. The most famous types of crude oils are WTI Crude Oil and Brent Crude Oil.
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 Crude Oil
WTI or the West Texas Intermediate is a grade or a mix of crude oil. Its spot and futures prices are used as a benchmark in oil pricing. Its grade is light crude oil due to its relatively low density. In addition, the presence of sulfur makes it the sweetest. Therefore, it refers to the New YorkMercentile Exchange WTI Crude Oil futures price.
There are various ways crude oil can be traded; our focus will be on retail forex trading platforms for this instrument.
Let us see how to calculate oil in the WTI forex platform Metatrader.
Lot Size of Crude Oil – oil pips in MetaTrader
The smallest price change for Crude Oil is 0.01 or 1 pip. So when the price rises from 40.00 to 40.01, it is 1 pip.
If we trade oil on the Metatrader platform, 1 micro lot trading size for 1 pip target is $0.01. If we buy 1 micro lot from 40.00 to 40.01, it is $0.01 or 1 pip. If we buy 1 mini lot from 40.00 to 40.01, it is $0.1 or 1 pip. If we buy 1 lot from 40.00 to 40.01, it is $1 or 1 pip. When traders calculate oil pips than 1 lot oil trading size, 1 pip move is equivalent to $1.00.
Many brokers give you 1:500 leverage on this instrument. 1:500 leverage means that you can operate a capital of $500 in the market for every dollar that you invest. This is what you need to open a 10 barrel position.
Other than the capital required to open a position, it would help if you also had marginal capital to support any floating losses. You will lose 5 pips as soon as you open a position as it is its spread.
The leverage offered by brokers is not always this high. Some brokers offer leverage as low as 1:40. In such cases, you will need more significant capital to open a position and support floating losses.
Pip Value of Crude Oil
A pip denotes the slightest change in the price of an instrument. It helps identify how a tool in the market has witnessed much fluctuation. For example, by most trading platforms, a pip in crude oil is considered to be $0.01. Remember that 1 lot oil trading size, crude oil 1 lot price, and 1 pip move are equivalent to $1.00.
How to Calculate Profit and Loss using Oil Pips in the Metatrader platform
Using the information that 1 lot oil trading size for 1 pip move is equivalent to $1.00, traders can easily calculate oil forex trading size position in Metatrader. This principle will help traders learn how to trade crude oil in the forex MetaTrader platform.
The trader bought 1 lot at 40.55 and closed the trade at 40.90. In this example, the trader generated 45 pips profit. Because the trader had a position size 1 lot, his gain was $45.
Buy 1 lot, gain 45 pips, profit $45.
Buy 10 lots, gain 45 pips, profit $450.
Crude Oil Profit Calculator
How to Calculate Profit and Loss when we have barrel contract
Let’s calculate oil pips for barrel contracts for the smallest position.
In a 10-barrel contract, the oil pip value would be $0.01*10 barrels = $0.10.
This oil pip value is stationery as the U.S. dollar is the quote or counter currency in the crude oil and U.S. dollar pair.
Let’s understand how profits and losses are calculated using crude oil signals by referring to this example:
Let’s assume that you are buying 200 barrels of crude oil bought at $50 each, and your profit is $55 each.
The easiest way to find out your profit is by using a simple arithmetic equation:
(Profit gained at one barrel – the cost of one barrel) * Number of barrels bought = Total Profit
($55 – $50)*200 = $1000
You can also calculate the total profit and loss by using the pip value of $0.10. You can multiply the number of pips by $0.10, and the result is then multiplied by the lot. The result will again be $1000.
Crude Oil and Related Instruments
The oil price is a crucial fundamental factor that can manipulate the value of a currency, especially if the country is a significant exporter or producer of oil and oil products. For example, Canada exports a considerable part of its petroleum products to the U.S. the Canadian dollar (CAD) enjoys a stronger position when the traded oil prices are on a higher side. However, a drop in oil trade volume or an increase in the instrument’s prices will negatively reflect on its currency and subsequent currency pairs like USD/CAD. Other currencies correlated to the trading oil prices are the Danish Krone (DKK) and the Norwegian Krone (NOK).
What Affects Oil Price?
Like any commodity, the oil price also fluctuates. The rate of consumption and production are two events that affect it. For example, a declaration made by the United States, stating that a considerable amount of energy has been drawn from their reserves, proves that there has been an increase in the consumption of oil. Since the demand has certainly increased, the prices will likely increase. This can be avoided only if the subsequent supply also increases.
The oil prices will drop if the demand declines or the supply overpowers it.
OPEC’s news also has a significant impact on the price of oil. The prices can spike rapidly if the Petroleum Exporting Countries (OPEC) Organization decides to reduce production. Investors will buy oil in considerable numbers to profit from it, leading to a further decrease in its supply.
War in the oil-producing country, delay in oil shipments for reasons like bad weather, damage to oil pipelines, a change in USD and other currencies, technology are a few more factors that affect the oil price. However, the list is not limited to these factors.