Crude Oil Trading Guide: Ways To Trade Oil [Plus Online Broker Recommendations]


Learn How to Start Trading Oil Today
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Risk Warning: Your Capital is at Risk.

In this guide, we introduce you to the oil market. You will learn about how oil trading works, ways to trade oil, and where you can trade it.

Despite the advancement of renewable energy, fossil fuels still make up the vast majority of world energy usage at 84% with oil representing the largest share at 33%.

In a hurry? If you are looking to get started trading oil ASAP, head over to our regulated brokers‘ list or see our top broker suggestions below:

The Basics: Understanding Oil Trading

Beginner traders may find themselves in deep waters with oil trading due to its high volatility.

This doesn’t mean oil is off-limits to beginner traders, but it’s important to familiarize oneself with technical analysis tools to get a better understanding of daily oil trends.

Some experienced traders may exercise a higher risk tolerance in hopes of greater profits with instruments like oil contracts-for-difference (CFDs) and oil exchange-traded funds (ETFs).

An exchange-traded fund (ETF) is a basket of shares or securities traded on an exchange.

Oil is one of the most volatile commodities to trade. With volatility comes great risk, as well as the potential for profits. Trading itself is based on asset price volatility, without it, there is nothing to trade.

The Organization of Petroleum Exporting Countries (OPEC) is an organization that serves as a market modulator and unifier of oil trade policies. OPEC’s main role is to regulate oil supply and prices worldwide.

Finding A Broker: Where Can I Trade Oil?

You may already be familiar with oil as a commodity and the ways you can trade it. Here are brokers available in that offer derivatives like oil CFDs and other financial products to trade on oil:

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Pros and Cons of Oil Trading

Oil is a popular commodity on a global scale, but trading it has its ups and downs. Oil trading has been around for some time, and there really isn’t a long list of advantages and disadvantages.

Pros

  • Potential for high-profit margins due to high volatility, especially in company shares with a smaller market capitalization

Cons

  • Oil is in fierce competition with nuclear and renewable energy resources like ethanol

Why Do People Trade Oil?

Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.

People may choose to trade crude oil over other commodities or assets. This depends on the trader’s experience and objectives. Some traders may choose to trade oil for:

  1. Diversification – Traders looking to add a highly volatile commodity to their portfolio may choose a high-risk, high-reward commodity like oil.
  2. Speculation – There are often wild swings in commodities prices; trading in oil futures and derivatives like CFDs can be a way to profit from notoriously volatile oil prices. Crude oil prices commonly move 5% in a single day. Traders must note that such volatility comes with an equal measure of risk.

Key Things To Know to Help You Understand the Oil Market

Every market has its distinctions — oil is no different.

Plus500‘s technical analysis tools and oil prices. This screenshot is only an illustration. Current market prices can be found on the broker website.

To make the best of your time and money while trading this commodity, here are some things to keep in mind:

  1. Technical Indicators: Technical analysis tools are used to understand price charts and analyze historical price patterns to get a better idea of potential future price movements. For example, Fibonacci arcs are used to find the difference between price highs and lows within a particular time frame.
  2. Brent and WTI: The two primary grades, thus pricing benchmarks for crude oil are Brent Crude, and West Texas Intermediate (WTI). The difference is the location of where their oil comes from – this affects the quality and disposition of the oil. Brent Crude oil comes from North Sea oil fields, while WTI oil comes from U.S oil fields.
  3. Trading Psychology: It is important to understand the crowd psychology of the traders of that asset – in this case, oil. By getting a better idea of how oil traders act in certain situations, you’ll have a better handle on prospective market movements.
  4. Supply and Demand: You can keep up to date with global supply and demand metrics by following selected news outlets like Forbes and The Economist.

Ways to Trade Oil

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

Online brokers and exchanges offer several ways to trade oil. The type of instrument you choose to trade depends on some of the factors we address in the comparison table below, like margin requirements, leverage, and contract terms.

See our detailed explanation of leverages and margins with examples.

Other factors like management costs are also important, and whether you actually own the asset while trading it.

Trading MethodOwnershipManagement CostsExpiry DateLeverage
Bullion
CFDs
Futures
Options✅ (if executed)
ETFs/Mutual Funds
Shares

How to Trade Oil CFDs

A “Contract For Difference”, or CFD, is a contract between a trader and a broker to exchange the difference in price between when a trade is entered and exited.

Leverages can be fixed or variable, based on the margin requirement of a broker for your chosen oil CFD.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

Just about every CFD broker provides the facility to speculate on the price of oil futures contracts but contract sizes are typically much smaller than standard futures contracts.

A crude oil CFD order can be for as little as 25 barrels (depending upon the firm) compared to 1,000 barrels for a standard futures contract.

Oil Is A Highly-Liquid Commission-Free Market

CFD trades are typically commission-free (the broker makes a profit from the spread), and since there is no underlying ownership of the asset, there is no shorting or borrowing cost.

oil trade dashboard
Photo by Stephen Dawson on Unsplash

Oil is a highly liquid market with fast-moving prices; it’s an ideal medium for day traders to profit from fast movement, although it comes with just as much risk.

How Do CFDs Work? Here’s An Example

Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.

Here’s an example. You’re bullish on WTI, so you decide to buy oil CFDs at the quoted price of $60.25 to $60.50 (the lower price is for a short contract, the higher for long).

WTI stands for West Texas International. It’s a is an indicator of oil grade/mixture, and a price point of oil contracts and futures contracts on the New York Mercantile Exchange (NYME).

To buy 10 long CFDs on 3% margin, you would need $1,815 in your account ($60.50 [long price] x 10 [number of contracts] x 100 [number of barrels in a standard contract] x 0.03 [margin percent]). You would then “control” $60,500 worth of oil for your $1,815.

That afternoon, you notice the price is $62.75, so you exit the trade, which now has a value of $62,750. You pocket $2,250 on the deal. If the price ticks down to $58.25, you would lose the same amount of money, $2,250, which is 24% more than you originally traded.

Oil Shares: Trading Oil Company Stocks

Shares are the least complex way to trade oil where you purchase equities in an oil company that you believe to become profitable at a future date.

There is usually a correlation between crude oil prices and oil company stock prices. But this is not always the case. And disasters as varied as pandemics and oil spills can make stocks plunge.

Interested in oil stocks? Here are the biggest listed oil companies:

CompanyCurrent PriceOverviewListings
Sinopec
Chinese oil and gas company based in BeijingShanghai (SSE), Hong Kong (SEHK), New York (NYSE), London (LSE)
Royal Dutch Shell
British-Dutch multinational headquartered in The NetherlandsLondon (LSE), Amsterdam (Euronext), New York (NYSE)
Aramco
Multinational oil company based in Saudi ArabiaTadawul
CNPC
Chinese oil company with headquarters in Beijing, ChinaShanghai (SSE), Hong Kong (SEHK), New York (NYSE)
BP
Headquartered in London but the USA houses the lion share of its operationsLondon (LSE), Frankfurt (FWB), New York (NYSE)
ExxonMobil
American multinational oil and gas corporationNew York (NYSE)
Total SA
French multinationalParis (CAC), New York (NYSE), Amsterdam (Euronext)

Oil ETFs: Buckets Of Oil Company Shares

Exchange-traded funds (ETFs) are also commonly used in oil trading.

Some oil ETFs are leveraged. The two types of leveraged oil ETFs are:

  • Standard Leveraged: delivers a multiple of a particular performance index.
    • 3X Leverage Example: 1.5% rise in the market, a 4.5% gain.
  • Inverse Leveraged: delivers a multiple of the opposite of a performance index.
    • 3X Leverage Example: 1.5% fall in the market, a 4.5% gain.

For a more detailed explanation of leverages see our broker page.

For example, City Index offers the following oil ETFs:

  • ETFS 2X Daily Long Wti Crude Oil CFD
  • ETFS 2X Daily Long Wti Crude Oil DFT
  • ETFS 2X Daily Long Wti Crude Oil June 20 Spread, 1D
  • ETFS 2X Daily Long Wti Crude Oil Sep 20 Spread, 1D
  • ETFS Crude Oil CFD
  • ETFS Crude Oil DFT
  • ETFS Crude Oil Jun 20 Spread
  • ETFS Crude Oil Sep 20 Spread

Oil Futures: Betting On Future Oil Prices

A futures contract is an agreement to buy or sell a quantity of oil at a specified date for a specified price.

These are standardized instruments for WTI and Brent; the standard contract is for 1,000 barrels of oil, so a $1 movement in price is equal to $1,000.

Either party, the buyer or the seller, can draw up a futures contract to purchase or sell at a further date.

Here are a few important things to know about oil futures:

  • Margin: Most oil futures contracts require about a 10% margin, which is relatively high given the cost of 1,000 barrels of oil, although margins can change depending on volatility—don’t be surprised to get a margin call on oil futures contracts.
  • Physical Delivery: Futures contracts are settled by physical delivery of the crude oil, which is something most speculators don’t want to deal with. It’s important to keep track of delivery and expiration dates and either roll the position over another month or close it entirely before the contract expires. If you don’t you may lose your money unexpectedly.
  • Complexity: Trading oil futures are typically for professional traders due to the high cost and complexity involved. However, contracts for difference or CFDs provide a convenient way to “access” the crude oil futures market.

Rolling over a futures position to a later date allows the owner of the contract to buy more time. This can be a tactical move to increase profit/decrease losses, or it can change the physical delivery of a commodity at a more convenient date.

Oil Options: A Choice To Abandon The Trade

With oil options, a trader essentially pays a premium for the right (not the obligation) to buy or sell a defined amount of oil at a specified price for a specified period of time.

Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange (NYMEX), one of the largest derivative product markets in the world

Despite their name, the underlying basis of these options is not crude oil itself, but crude oil futures contracts. The cost of options contracts is determined by the volatility of oil prices. The greater the chances of a big payout at the time of the contract, the more the options premium costs.

Overall Verdict On Oil Trading

It isn’t that simple. Whether oil trading is a worthy risk depends on the individual and how much they can afford to lose.

However, it must be noted that the commodity is undergoing an especially unpredictable period with the likewise uncertain global state of affairs in 2020.

If you do decide to trade oil, ensure that you are prepared to take the risks that come with it.

FAQs

Here are a few answers to help get you started if you’re considering trading crude oil.

How do I start trading oil CFDs?

The first step to trading oil CFDs is to understand how CFDs work and to find a reliable broker. Oil CFDs are complex, as well as high-risk. Traders would be wise to build a solid understanding of the CFD market, oil trading as well as technical analysis tools before considering trading oil CFDs.

What Are The Richest Oil Companies In 2020?

According to a January 2020 report by Statista, the largest oil company by revenue in the world is Sinopec at $432bn US dollars, followed by Royal Dutch Shell at $382.97bn, Saudi Aramco in third place at $356bn, and Petro China in a close fourth at $347.76bn. You can find the share prices, along with other oil giants in the oil shares comparison table.

What are Brent Crude and WTI in oil?

Brent Crude and West Texas International (WTI) are both oil grades and acting pricing benchmarks in the world oil market. Earlier in the article, we explain the main differences between Brent Crude and WTI, one of them being the location the oil comes from.

Credits: Original article written by Lawrence Pines. Major updates and additions in May 2020 by Marko Csokasi with contributions from the Commodity.com editorial team.

Sources

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