What is oil trading?
Oil trading is the buying and selling of different types of oil and oil-linked assets with the aim of making a profit. As oil is a finite resource, its price can see massive fluctuations due to supply and demand changes. This volatility makes it extremely popular among traders.
You can use CFDs to trade on oil’s spot price, or the prices of oil futures or options contracts, without having to own any actual oil.
There are three ways you can trade oil:
1. What is the oil spot price?
Oil spot prices represent the cost of buying or selling oil immediately, or ‘on the spot’ – instead of at a set date in the future. While futures prices reflect how much the markets believe oil will be worth when the future expires, spot prices show how much it is worth right now.
2. What are oil futures?
Oil futures are contracts in which you agree to exchange an amount of oil at a set price on a set date. They’re traded on exchanges and reflect the demand for different types of oil. Oil futures are a common method of buying and selling oil, and they enable you to trade rising and falling prices.
Futures are used by companies to lock in an advantageous price for oil and hedge against adverse price movements. However, they’re popular among speculative traders too as there is no need to take delivery of barrels of oil – although you have to fulfil the contract, this can be via a cash settlement.
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.
3. What are oil options?
An oil option is similar to a futures contract but there’s no obligation to trade if you don’t want to. They give you the right to buy or sell an amount of oil at a set price on a set expiry date, but you wouldn’t be obliged to exercise your option.
There are two types of options: calls and puts. If you thought the market price of oil was going to rise, you might buy a call option. If you thought it was going to fall, you’d buy a put. You can also sell call and put options, if you wanted to take the opposing positions. Selling options can generate income in quiet markets, as you receive their value at the outside of your trade. But be careful – this is your maximum profit, and you could lose far more if the market goes against you.
Learn what moves the price of oil
The price of oil is primarily moved by the relationship between supply and demand. When there is a demand for oil that outstrips its supply, the price of oil will rise. But if demand falls and supply floods the market, the price of oil will fall.
There are a huge number of factors that can impact oil supply and demand, we’ve taken a look at four of the most common below.
Factors affecting oil supply and demand
- The influence of OPEC
- Global economic performance
- Oil storage
- The push for alternative energy sources
Countries within the Organisation of Petroleum Exporting Countries (OPEC) produce a large share of worldwide oil supply. The group sets production levels to meet global demand, and can influence the price of oil by increasing and decreasing output.
During the 2020 Covid-19 pandemic, OPEC and its allies agreed to cut production rates to stabilise prices. But a disagreement with Russia – a non-OPEC country but large exporter – caused a sheer drop in the price of oil.
In periods of economic growth, the demand for oil increases to meet the needs of industries such as energy, transport, manufacturing and pharmaceuticals. If demand outweighs supply, then the price of oil will be driven up.
However, if the economy is in a period of recession, demand for oil will fall and lead to lower oil prices if production continues.
Oil traders often use economic data releases to understand the health of an economy – such as GDP and employment figures.
When the demand for oil fails but production continues, there will be a surplus of oil, which is diverted into storage facilities. But, there are limits on the amount of oil that can be stored. As these tanks fill up, concerns about surplus oil will impact market prices.
For example, in April 2020, traders’ worries over tightening oil-storage capacity amid the coronavirus caused crude oil futures to fall dramatically. At one point, the price of oil became negative for the first time.
As climate change moves to the forefront of global conversations, energy companies are increasingly under pressure to find new ways to generate power. The move toward alternative resources – such as solar, wind and hydroelectric – could lower demand for oil.
Decide how you want to trade oil with us
|Oil spot price||Oil futures||Oil options|
|Way of trading||CFD trading||CFD trading||CFD trading|
|Can I short oil?||Yes||Yes||Yes|
|Can I speculate on negative oil prices?
|Yes, if the futures we use to price the underlying market are negative||Yes, if the price of an oil future is negative, our price would also be negative||Yes, if the price of the underlying futures were negative|
|Will my position expire?||No, there are no fixed expiry dates||Yes, at the date of expiry||Yes, at the date of expiry|
Ways to trade Oil
- Trading oil at the spot price
- Trading oil futures
- Trading oil options
Our oil spot prices are based on the two nearest futures on the market in question. This means you’ll benefit from continuous pricing – enabling you to see charts across the market’s entire history, rather than just the duration of a single future – and no fixed expiries.
Our undated contracts are useful for taking shorter-term positions and performing technical analysis over a longer timeframe.
Once you’ve created your account and logged in, you can trade oil spot prices by:
- Searching for the oil market you’d like to trade – ie ‘Brent Crude’
- Selecting ‘spot’ in the right hand panel
- Choosing your trade size and opening your first position
When you trade oil futures with us, you’ll be trading CFDs on the underlying price. This means you won’t be entering into the contract, but deciding on whether it will become more or less valuable before the date of expiry.
After you’ve opened your account and logged in, simply:
- Search for the oil market you’d like to trade – ie ‘US Crude’
- Choose ‘futures’ in the right hand panel
- Select the expiry you’re interested in
- Pick your trade size and open your first position
At expiry, we’ll roll over your futures contract into the next month, unless you manually close your position. Please note that there may be a difference in the price for the next month’s contract.
When you trade US Crude oil options, you’ll be trading the price of oil options via CFDs. Options can be a great way to take control over your leverage – as you wouldn’t lose more than your initial outlay.
Once you’ve created your account and logged in, you’d just need to:
- Select ‘options’ from the menu on the left
- Tick ‘commodities’ and choose between US Crude daily, weekly, or monthly options
- Pick the option type, strike price and trade size you want
- Open your first position
Find your oil trading opportunity
You can trade a variety of oil markets with including popular crude oils WTI and Brent Crude, as well as no lead gasoline and heating oil.
The best way to identify an opportunity is to keep an eye on breaking news and key price levels, using our range of tools and resources:
Get technical and fundamental analysis straight from our in-house team
Keep your finger on the pulse with unique price and economic data alerts
Get actionable ‘buy’ and ‘sell’ suggestions based on analysis
Discover price trends using popular indicators such as MACD and Bollinger bands
Open your first oil trade
Now that you know how you’ll trade and what you want to focus on, it’s time to open your first position.
You’ll need to choose whether to buy or sell the market – depending on whether you think oil will rise or fall in price – and decide on your position size, which will determine the margin you pay.
This is also be a good time to think about how you’ll mitigate risk. We offer a range of solutions for risk management, including stop-losses and limit-close orders – these are used to close trades at predetermined levels of loss and profit respectively.
Monitor and close your oil position
Once you’ve opened your position, you can monitor the profit or loss of your oil trade in the ‘positions’ section of our platform.
While your trade is open, you should continue to perform technical analysis, identifying key turning points in the market. It’s also important to keep up to date with any news or data releases that could move the price of oil.
Once it’s time to close your position, you can either click ‘close’ or reverse your initial trade.
How does oil trading work?
Oil trading works by enabling you to take a position on whether futures contracts will rise or fall in value. Oil futures are contracts in which you agree to exchange a set amount of oil at a set price on a set date. They are the most common method of buying and selling oil.
What are the ways to trade oil?
Using CFDs, there are four ways you could trade oil with us:
- Spot prices
- Oil-linked assets such as ETFs and company shares
What is the best time to trade crude oil?
The best time of day to trade oil is when the markets are most active. These periods can occur quite regularly as oil is such a popular and volatile market. There is usually a lot of activity when the underlying exchanges first open, and in the last half an hour or so before they close.
So if you were looking to trade WTI, for example, you’d need to look at the trading hours for the New York Mercantile Exchange (NYMEX) – which would be 1pm and 6.30pm (UK time).
Is oil traded 24 hours a day?
You can trade oil for nearly 24 hours a day, five days a week, depending on which market you choose. Take a look at the table below for our oil trading times.
|Market name||Spot (undated contracts)||Futures||Options|
|US Crude||11pm Sunday to 10pm Friday||24 hours (except from 10pm to 11pm)||7.30am to 7.27pm|
|Brent Crude||11pm Sunday to 10pm Friday||1am to 11pm||N/A|
|Heating Oil||11pm Sunday to 10pm Friday||1am to 11pm||N/A|
|No Lead Gasoline||11pm Sunday to 10pm Friday||24 hours (except from 10pm to 11pm)||N/A|
All times listed in GMT
What is the difference between Brent, WTI and other types of oil?
Brent crude and WTI are the two most well-known types of crude oil. In fact, Brent crude is used as the world’s benchmark for oil prices – almost two thirds of futures traded are on Brent oil. It is from oil fields in the North Sea.
West Texas Intermediary is America’s benchmark oil – WTI is slightly sweeter and lighter when compared to Brent.
The other main oil type is Dubai or Oman crude, which is the Middle Eastern benchmark. It is typically a heavier oil and is used across Asian markets.
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