In the list of commodities available to traders, oil is especially popular. The supply and demand for it are constantly in flux, the volatility is rarely excessive, and liquidity is always available.
Go through this article to discover the detailed instructions on how to start your oil trading.
To start your development in this market, follow these essential steps:
- Understand how the oil market works.
- Choose the preferred method of trading.
- Open the proper position.
Oil market: How it works
When dealing with oil markets, you don’t need to operate with large volumes of crude. Luckily, most trading in this area is conducted through futures.
Oil futures can be defined as specific contracts in which a person agrees to exchange a particular amount of oil at a pre-agreed price on a due date. Operating with futures is the most common model of selling and buying oil.
Oil exporters and importers use futures to secure themselves from the potential negative effects of this commodity’s price volatility. They facilitate the operations with oil by depriving traders of the need to purchase this commodity in physical form. Meanwhile, the oil futures’ price changes dynamically depending on the value of oil.
Thus, instead of buying and storing oil in hopes that the price for it will rise and the commodity will be sold with profits, a trader can merely acquire a futures contract and use it as a subject of the subsequent operations until its expiration. This strategy can provide a trader with all advantages of oil trading while depriving him or her of the necessity to deal with logistical formalities.
Oil options present another instrument of trading in this particular niche. In most aspects, they are similar to oil futures. However, there is one crucial difference. Thus, similarly to futures, options allow you to acquire or sell a pre-established oil volume for a set price at a set date. However, after you’ve already purchased them, you are still not obliged to trade if you are unwilling to do it. In other aspects, like oil futures, oil options allow you to trade on the price fluctuations without the need to deal with the commodity physically.
Where you can trade oil futures
Just like shares, oil futures can be traded on exchanges. The main form in which this commodity is traded is an oil benchmark. In other words, benchmarks can be defined as reference points in determining the product’s quality and the location where it has been drilled. Using them, traders can quickly identify the most significant characteristics of the oil they are selling or acquiring.
Although there are many different oil benchmarks, the most popular two are West Texas Intermediate (WTI) and Brent Crude. They are traded at New York Mercantile Exchange and Intercontinental Exchange. You can trade benchmarks of oil and gas.
Oil spot prices
A significant concept to keep in mind when trading in the market under discussion is oil spot prices. These are the costs required to buy or sell oil in the industry immediately, without setting any future dates. Spot prices reflect the cost of oil at the moment when the deal is agreed on, unlike the prices of the futures that show the assumptions about the price that the commodity will have at the time when the agreement expires.
Trading oil: Three main ways
There are three common ways in which a trader can speculate on the movement of oil price. These include oil CFD trading, futures and options, and oil investment via ETFs and equities.
By presenting a person with the ability to speculate on the futures’ and options’ changing prices without the necessity to deal with these contracts directly, CFDs provide the essential model of oil trading. If you select this framework, you will create an account with a leveraged provider and use it instead of getting involved in the exchange of commodities.
There are several undeniable benefits that this trading system provides:
- The ability to trade on oil benchmarks’ spot prices, as well as options and futures.
- The ability to go short or long on a vast range of oil markets within a single platform.
- Suitability for beginners who are just starting their trading career.
Considering the factors mentioned above, by using CFDs, you can avoid numerous difficulties and formalities usually associated with trading that involves high liquidity commodities. This model opens the world of substantial large-scale transactions to trading newcomers. For instance, if not for it, beginners would not have been able to participate in seemingly complicated operations, such as WTI oil CFD trading, without prior experience or a rich portfolio. Therefore, trading oil through CFDs is suitable both for rookies and pros in the market.
Buying futures and options
Trading futures and options requires you to utilize the correct exchange for the oil benchmark you are willing to trade. Participation in most exchanges is regulated by setting particular criteria on who can take part in them. Therefore, this type of trading is mostly reserved for professionals. If you decide to trade options, one thing you should definitely think about is an options broker.
Finally, you do not have to deal with oil or even contracts concerning this commodity to get involved in the corresponding market sector. Hence, you are always able to purchase oil companies’ shares and ETFs (exchange-traded funds). Since oil companies’ prices are closely tied to the cost of oil, they undergo similar fluctuations as this commodity, making it possible for a trader to profit from shifts in market conditions. Besides, you can always use ETFs to make investments in oil stocks or oil benchmarks.