How to short oil prices and markets
Oil prices are closely linked to factors relating to supply and demand. Its volatile nature often creates opportunities to short-sell. Find out how to short oil prices with us.
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What does it mean to go short on oil?
Going short on oil means that you believe that the commodity’s price will fall, and you think you could profit from the market going down. This is also called ‘shorting’ or ‘short-selling’.
If you short-sell oil and the market price drops, you’ll make a profit. However, if the market price moves against you – ie goes up – you’ll make a loss.
As a hard commodity, oil is a finite resource, and its price can fluctuate immensely due to a variety of factors – but mainly changes to supply and demand. This volatility makes it extremely popular among short-term traders, presenting an opportunity to get exposure to the market regardless of the price trend.
Note that volatile markets are characterised by fast-paced price changes, which increases the likelihood of major price swings in either direction. That’s why you need to use risk management tools to limit the potential for loss.
There are two main oil markets you can short when you use our platform:
- Brent Crude oil (called ‘Oil - Brent Crude’ in our platform) is a major oil benchmark used by those trading oil. It’s defined as crude mostly drilled from the North Sea oilfields: Brent, Forties, Oseberg and Ekofisk (collectively known as BFOE)
- WTI oil (called ‘Oil - US Crude’ in our platform) is a blend of several US domestic light sweet crude oils. It’s drilled and processed in the US, and it’s mostly refined in the Midwest and on the Gulf Coast
How does short-selling oil work?
Short-selling oil works by opening a position based on the belief that there’ll be a downturn in the oil market. You’ll choose between using spread bets or CFDs to open a short position with us. Both methods enable you to sell the market without taking ownership of the underlying assets.
Our award-winning platform1 enables you to go short using a spread betting and CFD account in just a click. You’d elect to ‘sell’ the market, making a profit if the price falls, and a loss if it rises.
How to short oil
- Do your research about the market and your preferred trading style
- Choose the oil market you want to go short on
- Open a trading account – you can short-sell with spread bets or CFDs
- Select ‘sell’ in the deal ticket and choose your position size
- Take steps to manage your risk
- Open and monitor your position
Shorting oil via spread betting
You can use spread bets to short oil by betting a certain amount per point movement in the underlying’s price. With a spread betting account, you have more control over your position size, and currency exposure.
It’s a popular derivative because all your profits are tax-free, and there’s no stamp duty or commission payable.2 Also, spread bets are leveraged, which means you can get the full exposure of the trade with just a fraction of your initial outlay as your deposit.
Note that, when trading on leverage, your profits and losses are magnified. That means you stand to gain or lose more than what you put down to open the position. You’ll have to take necessary steps to manage your risk.
Shorting oil via CFD trading
With CFDs, you’ll sell contracts to exchange the price difference of oil between the opening and closing position. Just like spread bets, your profit or loss will depend on the outcome of your prediction.
When using a CFD trading account, you can offset losses against profits for capital gains tax (CGT) purposes.2 This is why many traders use CFDs to hedge their positions. Other reasons why this is a popular account type is that you won’t pay any stamp duty.2
CFDs are also leveraged derivatives, which means you’ll only need to meet the margin requirement to open a position. You’ll have to use risk management strategies because your exposure will be calculated based on the full position size, not just the margin amount.
Going short with oil futures vs spot oil vs oil options
With our spread betting and CFD trading accounts, you can short oil via our cash (undated) market, or via oil futures and options.
Oil spot price
Our undated spot oil markets take the price of the two nearest futures contracts because these tend to be the most liquid contracts. They offer real-time pricing with low spreads – perfect for day traders that want to sell oil immediately.
This is how most of our clients trade on oil. Note that they do have overnight fees, so you might want to consider that before you take a position.
Oil futures have a much larger spread than spot oil and they don’t have any overnight fees – making them better suited to longer-term traders. You’ll enter into a contract to exchange an amount of oil at a set price on a set date.
Learn how to trade oil futures
You can also trade oil options, which work like futures contract, but there’s no obligation to buy or sell the underlying if you don’t want to. Options give you the right to sell an oil contract at a set price on a set expiry date, but you wouldn’t be obliged to exercise your option.
Why would you short oil?
- If there’s short interest in oil, you’d get an opportunity to profit when the market falls
- You could hedge if you have existing positions impacted by oil price movements, eg if you own an oil stock that you think could fall in line with a declining oil price
What moves the price of oil?
The oil price is mainly moved by market forces of demand and supply. The price tends to rise when the demand increases. Additionally, if there’s more suppliers of oil in the market than the number of buyers of the commodity, the price of oil will fall.
Other factors that influence the supply and demand of oil include:
- The amount of oil consumption during certain seasons of the year
- Countries that are part of the Organisation of Petroleum Exporting Countries (OPEC) that set the production levels, and the oil reserves that remain will influence the price of oil
- Global exchange rates. As oil is priced in USD, a stronger or weakened dollar will affect the market
- Oil production affected by environmental or political issues
- The number of traders that participate in the financial market as well as the trade volumes
Risks when short-selling oil markets
- Theoretically losses are unlimited because there’s no cap on how high the price could go. You can attach stops to your position that lock in a maximum amount you’re willing to lose
- You could get caught in a ‘short squeeze’ – if oil prices rise and short-sellers all rush to exit their positions, this drives the price even higher
- When using margin to gain exposure, you face the risk of a margin call being issued if the price rises, which requires you to put up additional funds to balance the account, or close your position
Shorting oil summed up
- Shorting oil refers to borrowing the asset from a broker in order to sell it, and then buying it back at a lower price before returning it
- You can short-sell oil, which is a trading strategy that profits from the market price falling
- With us, you’ll choose between trading spread bets or CFDs to short oil via the spot market, futures, or options
- Market forces of demand and supply primarily influence the price of oil
- You must consider the risks of short-selling oil, such as the market moving against you or a potential short squeeze
1 Best trading platform as awarded at the ADVFN International Financial Awards and Professional Trader Awards 2022. Best trading app as awarded at the ADVFN International Financial Awards 2022.
2 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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