CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63.00% of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to trade oil

Oil is the driving force of the global economy, which makes it probably the most strategic and traded commodity today. And, of course, it also makes oil popular among traders. In this article you will learn how to trade oil, what affects the price of the oil and why is oil such a popular trading instrument.

Oil as a strategic commodity

Let's start with numbers. According to wikipedia, oil accounts for more than 95 % of food production; likewise, this commodity is needed for the production of more than 95 % of goods (to give you an idea - the production of one computer consumes ten times its weight in oil); 90 % of the transportation industry is powered by petroleum-derived fuels, and for every single calorie from commonly produced food there are 10 calories of oil contributing to it. And last but not least, oil is also used in the energy industry.

All this data leads us to the logical conclusion that oil is undisputedly the number one strategic commodity. Without oil the global economy would collapse like a house of cards.

What affects price of oil

  1. Supply and demand

    Like all trade goods, oil and its prices are subjected to the law of supply and demand. In terms of demand, oil prices are mainly influenced by countries on a higher economic level. These countries need oil for their developed industry.
    The offer is logically influenced by oil producers. Traders should therefore regularly monitor the state of oil stocks and its derivatives, reports on the state of active oil wells, and reports from "big players". All of which will be discussed later in this article.
     

    Top 10 world oil producers (in millions of BPD / barrel per day) - affect supply

    Top 10 world oil producers (in millions of BPD / barrel per day) - affect supply, source: worldpopulationreview.com
    Rusko Russia 10,58 BPD
    Saúdská Arábie Saudi Arabia 10,13 BPD
    Spojené státy americké USA 9,352 BPD
    Írán Iran 4,469 BPD
    Irák Iraq 4,454 BPD
    Spojené státy americké Canada 3,977 BPD
    Čína China 3,383 BPD
    Spojené arabské emiráty United Arab Emirates 3,174 BPD
    Kuvajt Kuwait 2,753 BPD
    Brazílie Brazil 2,622 BP

     

    Top 10 oil consumes (BPD) - affect demand

    Top 10 oil consumes (BPD) - affect demand
    Spojené státy americké USA 19,687 BPD
    Čína China 12,791 BPD
    Indie India 4,443 BPD
    Japonsko Japan 4,012 BPD
    Rusko Russia 3,631 BPD
    Saúdská Arábie Saudi Arabia                     3,302 BPD
    Brazílie Brazil 2,984 BPD
    Jižní Korea South Korea 2,605 BPD
    Spojené státy americké Canada 2,486 BPD
    Německo Germany 2383 BPD

     

  2. Price of the US dollar

    Due to the fact that oil is quoted in USD, its price is closely linked to the state of this American currency. It is therefore a directly proportional relationship, in which the weakening dollar also lowers oil prices and vice versa.

    The Canadian dollar (CAD) is a particularly strongly correlated currency in relation to oil. The correlation here is as high as 80 %, due to the dependence of the Canadian economy on exports of oil. So if you plan to trade oil, you should also monitor the development of the Canadian currency.

  3. Natural disasters

    In addition to economic factors such as supply and demand, the price of oil is also affected by nature. Storms, hurricanes, earthquakes and other natural disasters can damage mining infrastructure and disrupt oil supplies or processing and storage of this commodity. This has a negative effect on oil supply and leads to higher prices..

What reports to follow when trading oil

Daily

The latest information on oil supply on the US market can be found on the EIA (energy information administration) website. These are published on a daily basis and are sought after by many traders. The data presented here usually have a minimal impact on oil prices, due to their purely informative nature. This data is especially useful if you want to trade WTI oil (read more about oil types below).

 

Weekly

DOE report - a regular weekly report of the US Department of Energy, published every Wednesday at 16:30 CET. It reports the changes in the state of oil reserves and fuels (oil and their derivatives) in the USA, and is thus an ideal basis for monitoring the demand for WTI oil trading. This is a report with a relatively large impact on oil prices (especially WTI Crude oil).


Weekly DoE report

Weekly DoE report (source: https://www.eia.gov/petroleum/supply/weekly/)

Monthly

OPEC - MOMR (monthly oil market report) - the organization of the petroleum exporting countries (OPEC) currently consists of 13 member countries (Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela). They control 40% of the global oil supply and up to 75% of total reserves. It is thus a really big player in the global oil market.

The monthly oil market report (MOMR) therefore has an immense impact on oil prices and the oil market in general, and you basically cannot ignore it when trading oil.

What types of oil are traded most frequently?

The most frequently traded type of oil is Brent and WTI. There are other types, but the two are the best in terms of quality and their prices are very strongly correlated, so we will describe them in more detail here.

Brent (OIL)

It is a low-sulfur oil that is extracted on oil rigs in the North Sea. Due to its properties, it is described as light and sweet and is suitable for the production of diesel and petrol. Brent oil makes up around 70 % of overall oil market.

 

WTI (OIL.WTI)

West Texas Intermediate oil is extracted, as the name suggests, in the United States, specifically in Texas. It has similar properties to Brent (it is also light and sweet), however it has slightly better overall characteristics. WTI oil generally has a higher export price than Brent.
 

How to trade oil

There are 4 most common ways to trade oil:

 

  • Trading in physical barrels of oil

  • Purchase of futures contracts

  • Investments in oil shares

  • Speculation through CFD contracts

Trading in physical barrels of oil

Under the term "oil trader", most people probably imagine a person who orders a supply of a certain amount of oil in barrels, and then proceeds to store it with a promise of selling it once the price rises, ending up in profit.

The possibility of trading in oil in this way does exist, but it is really cumbersome for a small investor / trader. The minimum order for crude oil in physical form is 1 contract, which is 1000 barrels of crude oil. Therefore, if you do not have a warehouse or a smaller fleet of tank trucks, we recommend considering other options for trading in oil.
 

Purchase of futures contracts

Trading oil through futures contracts means buying a future delivery of a certain amount of "black gold" in physical form, but with a predetermined expiration date (aka date of delivery). However, the actual delivery of oil barrels usually does not happen, because the principle of trading oil through futures contracts is to buy, wait for the price to rise and sell the futures contract before it expires. If you don't make it in time, then we recommend renting a warehouse.
 

Investments in oil shares

As we have already mentioned, oil extends to almost every corner of the global economy, so it is no wonder that the oil industry is made up of a huge number of conglomerations, companies and firms. Whether these are mining companies or oil refining companies, retail investors have the opportunity to participate in their potential success and invest in their shares.
 

Speculation through CFD contracts

A very popular method of trading oil is through so-called contracts for difference. These are contracts artificially created by the broker, the price of which is usually derived from the price of oil futures contracts.

In this case, the trader does not directly own the oil, nor does he commit himself to its future ownership, he only speculates on its price.

In addition, the entire CFD oil trading process takes place exclusively online through the so-called trading platform. The trader is thus not tied to any particular place and can also trade on a mobile phone, for example on the way to work.
 

Advantages of CFD oil trading:

  • It is possible to trade with smaller capital - of all the mentioned oil trading options, CFD contracts are among the most financially affordable. The minimum deposits here are around CZK 2,500 / EUR 100.

  • Leverage - Determines the ratio of the amount of capital you invest in a given trade to the funds provided to you by the broker. At Purple Trading, we offer 1:5 leverage for Brent crude oil trading (i.e. you can open a $ 500 trading position with $ 100) and 1:10 for WTI. This gives you a chance for higher profit when trading oil, but keep in mind that potential losses will also multiply.

  • The ability to speculate on the rise and fall of oil prices - with CFD contracts, you do not own physical barrels of oil, which means that not only you don’t need to be worried about falling prices, but you even have the opportunity to profit from it. Provided that you will estimate that the price will fall.

How to choose a broker suitable for oil trading

You will need a brokerage agency to trade oil through CFD contracts. Here are a few characteristics a quality broker should meet.
 

Trading conditions

The speed of execution of trade orders is crucial (it is given in ms and the lower the number, the better). Furthermore, you should pay attention to spread prices (the difference between the BID and ASK price, again, the lower, the better). View execution statistics or spread prices at Purple Trading (oil spreads can be found under the Commodities tab).

Last but not least, commission fees are also important in oil trading. These are charged to traders for the volume traded and are usually given in USD / lot.

At Purple Trading, you can trade oil with zero commission.

Broker license

In general, brokers based in the EU are forced to show a higher degree of transparency due to regulations protecting clients. The so-called Offshore brokers, on the other hand, can offer higher leverage (1: 400 and more) with lower service fees. However, the client / trader is not protected to the same extent as with EU brokers.

Purple Trading falls under the Cypriot regulator CySEC. Our clients therefore have the highest possible level of protection in accordance with EU regulations.

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