Among all commodities, crude oil is top-traded across the globe. The volatile nature of the oil market brings excellent opportunities for traders.
The raw form of fossil fuels is called “crude oil.” It includes several compositions of organic (hydrocarbons) compounds and many other products.The prime purpose of selling and purchasing of crude oil is to refine it and extract products like:
- Jet oil;
- Other products.
Crude oil impacts and regulates the economy of the world. People have been trading it for a long time in high volumes.
Crude oil impacts – directly or indirectly – our daily life activities. In one way or another, everyone follows the oil market, including businesses, economists, and traders.
WTI (West Texas Intermediate) Crude Oil
There are two world-famous and established benchmarks of oil trading. One of them is the WTI, and the second one is Brent Crude. WTI is also called the US (United States) Crude.
WTI is the best in quality and sweet crude oil. It is extracted and refined in Texas, Louisiana, and North Dakota. The price of WTI is usually higher than Brent. Why? Because of the composition and quality of the oil.It acts as a reference price for:
Brent Crude Oil
Brent Crude Oil is extracted from the North Sea, and it is a well-known second benchmark of oil trading.Just like the WTI, it is also referring as the standard price for the:
It is extracted and refined in Northwest Europe, and it is a prime source of oil in Europe.
OPEC (Organization of Petroleum Exporting Countries)
The OPEC Basket is commonly known as the OPEC Reference Basket. It is the weighted average of the oil prices of OPEC-produced curd oil blends.
OPEC plays a vital role in tracking inflation as energy is one of the most significant parts of the world’s expenses.OPEC The basket comprises of several varieties of crude oil, for instance, light & heavy, sweet & Sulphur content from across different countries of the world like Algeria, Ira, Qatar, Iran, Angola, UAE, and many other countries. As this is the fine mixture of different crude oils, that why it is usually lower in price as compared to the Brent & WTI.
5 Significant Differences Between WTI & Brent Crude Oil
Undoubtedly, WTI & Brent crude oil are essential tools of oil trading, but there are significant differences between both of them. Let’s have a look at this one by one.
Factors Affecting the Price of Oil
Several factors affecting the price of oil, and a trader must observe these factors to enjoy profitable trades.
- Political insecurity has a direct relation to the price of commodities. The instability of political events somehow affects the price of crude oil.
- The threat of war or conflict;
- Law of demand and supply;
- Natural Disasters;
- Global crises of the market;
- The amount of subsidies provided by the government to the Oil Companies can also impact the price of crude oil;
- Government Policies;
- Competition in the market;
- Overall Global Supply of oil can also affect the price of oil.
What happens When the Oil Prices Increase?
Like any other trading, the trading of crude oil is always affected by economic & political news. If the price of the oil is higher, it will affect economic growth because, with it, the cost of traveling will increase. The overall shipping price will increase, and in fact, it will disturb the prices of all downstream products, for instance, vegetables, fruits, plastics, glass, furniture, fertilizers, and many others as well.
What happens When the oil Prices Decrease?
Since the last few weeks, the prices of crude oil fell dramatically. Both Brent & WTI experience around 33% downfall in price per barrel. Pippa Stevens at CNBC wrote that “U.S. West Texas Intermediate crude and international benchmark Brent crude are both pacing for their worst day since 1991.”
The statement gives us the idea that oil prices are bad for the oil producer & good for the oil consumer. This oil downfall in oil prices is overall good for the world’s economy. During that, the companies are associated with the oil, for instance, the oil drilling companies, oil refining companies, and others couldn’t make more capital to meet their needs.
Relationship between Geopolitics & Price of Oil
According to the latest stats of Top, oil-producing countries are the U.S, KSA, Russia, Canada, & Iraq are the top 5 countries that are producing nearly half of the total crude oil. So, any disturbance in these countries, either political, war, or any other sort of high-level conflict, can influence the total supply of the world’s oil. A
So, if you are an oil trader, then it is good to stay up to date with the political situation of the world, especially for the following top ten countries of the world as they are Major oil contributors.
Benefits of Crude Oil Trading
Several benefits are associated with the trading of crude oil as it is one of the most important & top traded assets of the world. A few of the benefits are discussed below.
The rate of change of price of oil in either direction (up or down) is known as volatility. For instance, currently, the volatility of oil is 15%. And let say the price of oil is $100. Then it means the cost of the oil will change by 15% in either up ($115) or down ($85). The volatility of the oil price is one of the significant advantages of trading WTI or Brent crude oil. With each swing, the price of the oil tries to move up or down. This movement of the price of oil provides opportunities to the traders to earn a lot on these movements through on spot trading, day trading, or yearly trading.
Diversify your portfolio
Always follow the rules of diversification. Some of the traders are struggling hard with having all the investments in one basket but all in vain. Because if you invest in one single market, then what happens if the market goes down? Your entire portfolio can wipe out within no time. That’s why it is highly recommended to diversify your investment & trade range. It will help to mitigate the risk of losing all.
That’s why investing the crude oil commodities is one of the most useful ways you can adopt to diversify your portfolio. And above all, risk management will be easier for you.
Trade the Fundamentals
Despite its daily usage, many of the people do not know the significant differences between crude oil (Fundamentals) & gasoline (product). Crude oil is refined to produce the products (gasoline, jet oil, and others). The fundamentals are quite different, as it is the raw material for multiple crude oil products like gasoline. The crude oil is available in the market in different grades. You can trade any fundamental.
Methods of Investment in Crude Oil
There are many ways through which you can adopt to invest & trade in the crude oil market for instance
- Buy Crude Oil Barrels Directly;
- Invest your money in Crude Oil Stocks;
- Trade Crude Oil Futures;
- Purchase Crude oil EFTs;
- Trade Crude Oil CFDs.
Buy Crude Oil Barrels Directly
The simplest & straight forward way of investment in the crude oil market is to purchase the oil barrel directly and sell it later when the price of oil inclined.
In a real-world scenario, trading the oil is not as easy! You need legal rights & insurance to store, buy, & sell the crude oil Don’t worry! There are several other ways through which you can enter in crude oil trading market. And these methods are far more feasible.
Invest your Money in Oil Stocks
Investment in oil stocks is the first & foremost option in the oil market. Undoubtedly, profiting when the price of oil starts increasing. So, ideally investing in the stocks of the organizations that are directly or indirectly involved in the business of oil like exploring oil fields, producing oil, or even refining oils is a great choice. There are several companies in which you can invest. See below the list of top 10 companies.
The most challenging part of invest money in stocks is since you are not directly involved in the oil. You are investing in the shares of that organization, and the price of shares doesn't always reflect the price of oil because many factors that act together to decide the price of the company's product.Some of these factors including:
- Public interest;
- Changes in management;
- Total shareholders;
- Rules & Regulations.
Trading of oil Future
Another useful option to invest in the oil market is to trade the oil futures. It is the most practicing option to trade WTI Crude Oil and Brent Crude Oil.
What is the Oil Future?
Future contracts are the legal agreement of selling or buying an asset at the predefined price at a specified time in the future. From the trading perspective, oil future contracts are the legal agreement in which both parties (buyer & seller) of oil agree to deliver a particular quantity of crude oil at the settled rate on a given date of the future.
Oil-producing companies can sell their Future contracts and can effectively lock their current prices—the prices of the futures contract change daily. For instance, if the price of a per barrel is $60 at the time of Future Contract and You are sure that the price of oil will increase before your future contract gets expire. At that moment, you decided to purchase the future contract of 1000 barrel @ $60 per barrel.
Now let's say the price of the barrel rises from $60 to $65 and the contract is about to expire. And you close the contract.Let's calculate your profit:
- Purchasing Price = $60;
- Selling Price = $65;
- Profit on One barrel = Selling Price – Purchasing price = $65 - $60 = $5 per barrel;
- Total Gain = $5 * $1000 = $5000 USD.
One more important thing about Trading Oil Future is that at the time of purchasing the contract of 1000 barrel, you don't need to pay the full amount of contract (60$ x 1000 = $6000$). You can make margin payments by paying a few dollars.
Exchange-Traded Funds of Oil
Crude Oil ETFs track the changes in the price of crude oil & it allows the traders to gain the overall exposure of the crude oil market without any future account. The key benefit of Trading ETFs is that it offers opportunities to the traders to invest in the big market.
For example, being an investor or trader, you want to participate in "US Oil Stocks," but you want to save yourself from searching an individual stock to add in your stock portfolio. Then we could search the Exchange Trade funds that are representing the "US Oil Stocks Market."
There are several commodity EFTs like "EFTs of US Tech Stocks" or EFTs of US Crude Oil Stock." They may involve either share of companies dealing with Crude oils or Futures of crude oil.
ETFs of Crude Oil Traded in the United States of America
CFDs of Crude Oil
The last choice for exchanging Crude petroleum is trading utilizing CFDs. CFD represents a contract for differences, and it is an instrument that permits you to exchange price changes in raw Oil. In CFDs, no need to deal with the physical contracts or to invest in any tangible assets.There are several benefits associated with exchanging crude Oil through CFDs, for example:
- A great choice to invest in crude Oil without physically dealing with the barrel;
- With the CFDs, you can exchange for both long & short time. That’s a great chance to win profit regardless the market is moving up or down;
- With the CFDs, you are capable of performing short term trades.
- Size of Future Contract = 1,000 barrel of Crude Oil;
- Size of Standard oil CFD = 1000 barrel of Oil;
- 1 lot = 100 barrels;
- 0.1 lot = 10 barrels;
- With the CFDs, you will be able to trade 24 hours of the day, five days of a week, and everything is online. So, all you need Exchange Account & working internet connection;
- With the CFDs, you can enjoy a larger portion of market profit than the amount you invested.
Example of CFD Trading
CFD Trading: WTI Light Crude Oil
While analyzing the market closely, you came to know there are chances of price increment of SPOT WTI Light Crude Oil & you are sure that the price will start rising within a few days. The current quotation of the brokers is 73.25 to 73.30.
Finally, you make a decision to purchase the 30 WTI Light Crude Oil CFDs at 73.30.
Well, after some days, you start seeing the price of the WTI Light Crude oil start increasing & the brokers are currently quoting the price 74.12 to 74.17. Here you make a decision to close a small part of your order by selling 15 CFDs at 74.12. Let’s calculate the profit you make.The currency in which WTI is dealing is USD$:
- Purchasing price 73.30;
- Selling Price 74.12;
- Profit (USD) = (7413-7330) * Your Stake (15) = USD$1,245 USD.
Now you are left with 15 CFDs of WTI Light Crude Oil, and you feel that still there exists some space for the further price! Very next day, you notice that the price of the WTI Crude oil increase as you predicted. Currently, now the brokers are quoting a price between 74.82 to 74.87. Suppose you sell the last 15 CFDs of WTI Light Crude Oil in 74.82.Let’s calculate the profit you make:
- Purchasing price 73.30;
- Selling Price 74.82;
- Profit = (7482-7330) * Your Stake (15) = USD$2,280 USD;
- Total Gain (USD) = USD$1,245 + USD$2,280 = USD$3525.
Note: For the sake of understanding & Simplicity, the daily financing costs are not included & the currency in which WTI trade in USD$.
CFD Trading Example: Spot Brent Crude Oil
Suppose you have done the analysis of the Brent Crude Oil market & based on your knowledge & experience, you are sure that in new next few days, the price of the Oil will fall due to a decrease in the demand for Oil.
- The brokers are quoting the price from 6543 to 6548.
At that moment, you have decided to sell some of your CFDs. For instance, let’s say 20 at 6543.
Just after a few days, you realize that the price of the Brent Crude Oil starts rising, and now the brokers of Oil are quoting 6562 to 6567. And at that moment you decide to close your order at 6567.Let’s calculate the loss you bear. Loss = (6567-6534) * 20 = USD$480. Note: For the sake of understanding & Simplicity, the daily financing costs are not included & the currency in which WTI trade in USD$.
Comparison between CFDs & FuturesOil CFDs & Futures are the most common method of crude oil trading. From the trader perspective, the comparison between both of them is really worthy in order to find out which one is more beneficial to invest in the oil market. Undoubtedly, there is much difference between both of them. The table below clearly mentioned the differences.
Best Strategies of Crude Oil Trading
Once you have to find the broker who is going to help you to trade crude oil online, the very next thing you must think about is “Trading Strategies.” You May Ask Yourself How to Trade Oil in Real World. Come up with an implementation plan is critical because you don’t want to risk your capital.
According to the latest strategies, the majority of oil trading methods are divided into different styles of trading & time frames. Here we have summarized some of these trading styles for you.
How to Analyze the Oil Market?
Fundamental Analysis: You can analyze the market by gathering different data and statements about the future events that are going to impact either the demand or supply of the oil.
Technical Analysis: You must do the technical analysis of the data you gathered. You can use the techniques of analyzing the oil price charts through candlesticks together with the different indicators.
Wave Analysis: With this method, you can analyze the overall behavior of the price from charts to understand the market structure and to find out the answer to “Is there are any trading opportunities in the market or not?”
Best Time Frames for Different Traders
- If you are a long term trader, then use higher Time Frames between weekly or daily Charts;
- If you are a swing trader, you can use time frames between daily charts or 4-hour timeframe;
- If you are an Intra-Week Trader, you can use the timeframe between 1 hour to 4 hours;
- If you are an intra-day trader, then you can use charts timeframe between 15 minutes to 1 hour;
- If you are a scalper, then you can use low charts timeframe between 5 min to 1 min.
Time Frames Combinations to Trade Crude Oil
Being a trader, you are at liberty to combine any number of time frames & styles. But here, we are going to discuss the most common time frames combinations.
- Style: Fundamental Analysis;
- Time Frame: Long Time Frame.
Explanation: While trading WTI by using fundamental analysis, then you can set up a long term trade on the base of high time frames (weekly or daily) if and only if the timeframes are available. Changes in the fundamentals are slower as compared to the other that’s why it required fewer trade setups.
- Style: Fundamental Analysis;
- Time Frame: Short Time Frame.
Explanation: If you are using the news & data for trading, then you must set up your trades for short times, which means you must trade on lower time frames. You can use specific tools that provide you the updated news, market condition, and future predictions. You can also use any reliable Forex Calendar to stay up to date with these kinds of information.
- Style: Wave Analysis;
- Time Frame: Medium Time Frame.
Explanation: Wave analysis is best to trade a minimum 60-minute timeframe or higher time frames, but if you are using wave analysis, then it is more productive to start with a 4-hour time frame or higher. Why? Because interpretation of the waves pattern is usually time-consuming. Secondly, the analysis of wave patterns requires a lot of experience. But if you are using higher time frames, then it will be easier for you to understand the dynamics of waves.
Style: Technical Analysis.
Time Frame: Medium Time Frames
Explanation: Technical Analysis can be used for higher time frames, but most of the time, it is useful for the medium time frames and quick enter/exits. With the Technical analysis, you can also make a bit more robust trading action plans.Indicators most of the times are:
- Trend lines;
- Moving Average.
Style: Technical Analysis.
Time Frame: Short Time Frames
Explanation: Scalpers are most widely using those indicators that can make automatic calculations, for instance, the indicators like
- Keltner Chanel;
- Pivot Points;
Scalper does not use manual tools like Fibonacci and oscillator. Why? Because in technical Analysis and short time frames, the price of changes too quickly on lower time frames & in that case sound decision can only save you.
Combination 6 Combining Different Styles & Time Frames
Some of the traders like to use a combination of different styles & time frames because they don’t wish to limit themselves. Combining various styles & time frames, although it brings significant benefits, the risk is also associated with it. Playing with varying techniques of analysis & different timeframes at one time can confuse you and ultimately affects your decision.
Best Crude Oil Trading System
As we mentioned earlier, the traders can combine any number of analyses to form the best Trading Strategies. However, the Best Trading System comprises of following elements.
- Type of Analysis (Fundamental, Technical, Waves, or combining 3);
- Time frames. (Short, long, or scalps);
- Risk Management Technique;
- Market Entering methodology. (including opening price);
- Market Filters (Reason: why not enter in the market);
- Management of Trades, including Stop loss & Exit criteria;
- Closing Methods. (closing price);
- Evaluation of Trades.
It is very crucial to consider the care of the elements mentioned in the list before starting oil trading. Building the Trading system means establishing a successful approach to trade for an extended period.
Recommended Platform to Trade Crude Oil
Either you wish to trade Brent or WTI Crude oil, there are several markets you can approach, but among these thousands of trading platforms, the best one is MetaTrader 5 with the MT5 Supreme Edition plugin.
This platform is offering the charting platform, which is super user-friendly. You can easily navigate between different options. It also equipped with add-on features like
- One-Click Trading;
- Live Market Updates;
- Monitoring of Real-Time Trading.
On MetaTrader 5, along with the WTI & Brent, you can also experience several financial instruments like
- Stock Prices;
- CFDs on commodities.
The MetaTrader Supreme Edition Plugin is the best plugin to use with MT5 because of its long list of features, indicators, and extra tools. In the ordinary package of the Meta Trader, you will get limited features whereas the MT5 Supreme Edition plugin equipped with the
- Trade terminal;
- Mini Terminal;
- Tick Chart Trader;
- Mini Charts;
- Multiple Time Frame Analysis;
- Trading Simulator;
And a lot of extra indicators like
- Pivot Points;
- Keltner Channels;
- Many others.
Key reports for every oil trader
In the oil trading market, it is essential to stay up to date with the current demand and supply of oil. In this regard, there are specific reports that every oil trader must follow.
Weekly updates on the Crude oil inventories in the United States is a worthy piece of information for all oil traders. This inventory data is undoubtedly a significant barometer to measure the demand for crude oil. For instance, there is an increment in the weekly inventories, and then it's mean that the need for the oil is going to drop. While on the other hand, if the stocks experience a drop, then the demand for crude oil is going to increase.
- The American Petroleum Institute releases weekly stat reports that featured the most crucial products of petroleum that account for more than 80% of the total production while inventories of crude oil also part of the release. This data is generally released on every Tuesday at 16:30 ET and 21:30 of London Time.
- Just like the API Report, the Department of Energy report releases the information on the supply of crude oil & the level of inventories of crude oil & other refined products. This report is also published on every Wednesday at 10:30 ET and 15:30 London Time.
Selling and purchasing of CFDs executed in dollars. So, if your broker account is dominating in sterling Pounds or Australian Dollars, then you will experience currency fluctuation due to different pairs of currencies. That’s the reason the CFDs brokers in the US or UK are in an ideal situation to trade crude oil.