How To Trade Oil 2020
Welcome to Trading Brokers step by step guide to trading oil in 2020. Here you will find an easy to understand explanation of oil trading. This includes how to trade oil online, what you need to trade oil and how to open a trading account with a broker so that you can start trading oil online today.
Maybe you have heard of oil trading online or through a friend. Perhaps you are looking to trade and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to trade oil can help you along your journey.
History of oil
Throughout human history, even before oil and gas, energy has been a key enabler of living standards. Wood was burned for warmth, cooking and used as a building material.
The beginning of the 18th century brought about the invention of the first modern steam engine, which indicated the transformation from an agricultural society to an industrial economy.
Although steam engines could be powered by either wood or coal, it wasn’t long before coal became the fuel of choice and it soon enabled significant growth in the scale of industrialization. Coal produced four times as much energy as wood whilst it was also cheaper to produce and easier to distribute.
When the 20th century approached, environmental concerns and technological breakthroughs led another energy source shift from coal to oil, which emerged as the preferred energy source.
Amongst the key factors that influenced this transformation were the electric light bulb and cars. Car ownership and demand for electricity grew exponentially which in turn, increased the demand for oil.
Today, oil remains a main source of energy although burning oil releases carbon dioxide into the atmosphere, contributing to the warming of our planet. Petroleum accounts for a large percentage of the U.S.’s carbon dioxide emissions from fossil fuels. Scientists say the world cannot afford to burn more than one-third of known oil reserves in order to avoid the worst impacts of climate change.
That being said, companies are increasingly exploring alternative forms of creating energy such as solar, wind and hydroelectric. Governments are also continuously exploring new legislations to help limit the impact on the environment. Currently, oil remains a popular commodity on a global scale, which makes it easily accessible to trade online.
What is oil trading?
Oil trading is the buying and selling of different types of oil and other oil-linked assets with the goal of turning a profit. As oil is a finite resource, meaning it is limited, oil prices can see large fluctuations when there are changes in the supply and demand. The volatility of oil therefore makes it a popular trading instruments among traders.
How does oil trading work?
You can trade popular oil markets – such as US and Brent crude – and oil-linked ETFs, online through various methods including spot markets, futures contracts, options contracts, spread bets and CFDs (contracts for differences).
Spot trading oil
Oil spot prices show what the cost of buying or selling oil right away is, hence the reference to “on the spot” rather than a set date in the future. On the other hand, futures prices show how much the markets have determined what they believe oil will be worth when the future expires.
Trading oil futures
The spot market is where financial instruments, including commodities such as oil, are traded for immediate delivery. Delivery is the exchange of cash for the financial instrument. A futures contract, is based on the delivery of the underlying asset at a future date, in which you agree to exchange an amount of oil at a set price on that date.
Oil futures are traded on exchanges and reflect the demand for different types of oil. Oil futures are one of the more common methods of buying and selling oil online, as they enable retail traders to speculate on rising and falling prices without needing to take delivery of barrels of oil. Futures are also used by companies who want to lock in an advantageous oil price and to hedge against adverse price movements.
Trading oil stocks
Oil prices directly influence the value of oil exploration company shares. One of the most popular ways of crude oil investing is to buy the leading oil stocks. When choosing the best oil companies to invest in, you may wish to analyse the stock performance by checking out the company’s annual reports, giving consideration to revenue, net income, earnings per share, debt level and dividends they pay to investors. Some of the key crude oil market players at the moment include:
- Sinopec: This is the largest oil refiner in Asia.
- ExxonMobil: The world’s leading refiner with a capacity of processing around 6 million barrels a day.
- Royal Dutch Shell: Shell operates over 40,000 oil service stations globally.
- BP: The company was the first to discover oil in the Middle East.
- Total SA: This oil giant operates over 900 subsidiaries, which cover all areas of energy production.
Trading oil options
An oil option is similar in some ways to a futures contract although there is no obligation to trade if you decide that you don’t want to. Instead, oil options give you the right to buy or sell an amount of oil at a pre-agreed price on a pre-agreed expiry date. However, you do not have to exercise the option.
There are two types of options: calls and puts. If a trader was under the opinion that the market price of oil was going to increase, they may consider buying a call option. If on the other hand, the trader thought that oil prices were going to fall, they may want to buy a put option.
It is worth noting that traders can also sell call and put options, if they wanted to take the opposing positions. It is of course important to be careful as you could lose should the market move against you.
Trade oil ETFs
Oil ETFs (exchange-traded funds) combine the stocks of oil companies and oil futures into one single fund, which saves traders the hassle of picking individual oil stocks and looking for the best performers.
Energy-sector ETFs, such as the US Oil Fund (USO) and iShares Global Energy Sector Index Fund (IXC), could be traded the same as stocks whilst spreading the risk of investing in a highly volatile oil market.
CFD oil trading
CFD financial instruments allow traders to speculate on both rising and falling prices without actually owning the underlying asset which is oil in this case. This can be more convenient for some traders and means that there is no need for storing or securing physical quantities of oil.
Traders would open long (buy) positions, if they think the price of oil will rise or short (sell) positions if they thought that the oil price will fall. The difference in price between the entry and exit price is the traders realised profit or loss, excluding any broker commission and fees.
The majority of brokers who offer oil CFD trading will provide access to leverage which enables a trader to control a larger position size with a small deposit. For example, an account balance of $1,000 with 1:5 leverage, could theoretically take a position size of $5,000. Whilst this can increase profit potential, it also significantly increases risks and the potential loss from a trade. Therefore, it is imperative traders have a clear understanding of how leverage works and the risks involved.
Where to trade oil?
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
Min $100 Deposit
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
Types of oil
There are over 160 different types of crude oil traded on the markets. West Texas Intermediate (WTI), Brent Crude, OPEC Reference Basket, Dubai Crude, Bonny Light and Urals are just six of many.
The two most popular types are Brent Crude and West Texas Intermediate (WTI), which are traded on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX) respectively. They are used as benchmarks for global oil prices, as well as economic health and tend to draw the most attention among traders, investors and market analysts.
West Texas International (WTI)
WTI is a top-quality crude oil that is commonly referred to as US Crude and is valued highly around the world. It’s a common belief that a greater quantity and quality of gasoline may be refined from one barrel of WTI than from any other type of oil traded on the market.
West Texas Intermediate is a light and sweet crude oil that is refined in the United States, which is amongst the largest gasoline-consuming countries in the world. WTI is usually priced a few dollars higher than Brent Crude oil and even higher than OPEC Basket oils.
Brent Crude is another important oil, one that typically serves as a benchmark for oil prices all across the globe. Primarily extracted from the North Sea, it consists of Brent Blend, Forties Blend, Oserberg and Ekofisk crudes – known as the BFOE Quotation.
Brent crude is the most traded of all of the oil benchmarks, and is widely used as it is both sweet and light, making it easy to refine into diesel fuel and gasoline.
OPEC oil serves as a combination of seven different types of crude oil coming from Saudi Arabia, Nigeria, Algeria, Dubai, Venezuela, Indonesia and Mexican Isthmus. Founded in 1960, Organisation of Petroleum-Exporting Countries (OPEC) is one of the bigger players in the oil industry, managing oil production and sale within its jurisdiction.
OPEC oil is less sweet and much darker than WTI and Brent, which makes it slightly cheaper. Never the less, it still remains an extremely important player on the global oil market.
What moves oil prices?
The price of oil mainly changes according to the supply and demand. There is a vast range of factors that can have an impact on the supply and demand of oil. When there is a high demand for oil that is greater than its supply, the price of oil will likely rise. On the contrary, if the demand of oil falls and supply increases in the market, the price of oil will likely fall. Some of the key factors that impact the supply and demand of oil include:
- The influence of OPEC: Countries within the Organisation of Petroleum Exporting Countries (OPEC) produce a large share of the oil supply worldwide. The group sets production levels in order to meet global demand, and thus can influence the price of oil when they decrease and increase the output.
- Global economic performance: When there is economic growth, the demand for oil increases to meet the needs of various industries such as energy, manufacturing, transport, and pharmaceuticals. In this instance, if the demand outweighs supply, then oil prices can increase. However, if the economy is in a period of recession and there is a lack of growth, demand for oil may decrease, which can lead to lower oil prices if production continues.
- Oil storage: If oil production continues when the demand for oil falls, there will be a surplus of oil that gets put into storage facilities. However, there are limits on the amount of oil that can be stored which can lead to tanks being filled up and have an impact on oil market prices.
- Changing to alternative energy sources: With global warming being at the forefront of people minds, energy companies who rely on oil are increasingly looking to find new ways in which they can generate power. If there is a significant move towards an oil alternative such as solar, wind and hydroelectric, this could lower the demand for oil and impact oil prices.
Oil traders will often use economic news releases such as gross domestic product (GDP) and employment figures to anticipate the direction of oil prices.
Why trade oil?
Crude oil is the world economy’s primary energy source, making it a very popular commodity to trade. A naturally occurring fossil fuel, it can be refined into various products like gasoline (petrol), diesel, lubricants, wax and other petrochemicals. It is highly demanded, traded in volume, and extremely liquid. Oil trading can therefore deliver tight spreads, clear chart patterns, and high volatility.
Traders may choose to trade oil as way to try and earn profit by speculating on oil prices. For instance, when trading oil CFDs you can speculate on prices without actually needing to physically own barrels of oil. This makes it a convenient trading method for anyone who has a trading account with an online broker. Companies may also trade oil to lock in an oil price and hedge against adverse price movements.
How to trade oil online?
If you have taken the time to read through the above, you should hopefully have an understanding of how to trade oil. Here is a summary of the key steps:
1. Decide if oil trading is for you
Trading oil online carries an element of risk and can take more time than other forms of investing. You will need to research the oil market, manage your positions, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading oil online.
2. Educate yourself
Before trading oil, it is imperative to learn as much as possible about investing and trading online. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online oil brokers that can help you to improve your trading skills and knowledge.
Most oil brokerages will also provide a free demo trading account so that you can practice trading oil online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose an oil broker
In order to trade oil online, you will need a broker account and trading platform to execute your trade positions through to the market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research the oil market
If you have made it this far then you may be ready to start trading oil online! The next step is to research the oil market to help increase your knowledge. The best brokers should have this information conveniently displayed for you within their trading platform.
5. Have an oil trading plan
Some of the most important factors that can help determine oil trading performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Buy and sell oil
Once you feel ready to trade oil online, you can analyse the market to help decide if and when you will place your trades. After placing a trade on oil, you will need to keep track of how it performs and manage it according to your trading plan. Some investors will keep hold of oil trades for the long-term, whereas traders may buy and sell oil on a daily basis.
Is oil trading right for me?
Oil trading is a popular choice for long-term investors and active traders. It can be suitable for scalping, day trading and swing trading. Traders who would usually trade forex, trade stocks, trade indices, trade commodities, trade cryptocurrency, may look to diversify their portfolio.
However, it is important to understand the significant risks involved with trading oil online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade oil and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most oil brokers provide unlimited demo accounts free of charge.
Not sure which oil broker to trade online with?
If you are still unsure which oil broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best brokers, best trading platforms, best copy trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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