Oil is among the most commonly used commodities in the world, and its price affects the prices of many other commodities, such as gasoline and natural gas. Besides, fluctuations in crude oil prices also affect the value of securities, bonds, and currencies around the world. Oil is one of the best commodities to trade because the market is incredibly active and well known to traders around the world, which creates multiple opportunities for traders. Overall, investing in oil has different options and ways, which will be outlined below.
Types of oil
The type of oil depends on the geographic location of the oil field and the characteristics of the oil itself. Although there are numerous types of oil traded on the world market, two types of oil are the world benchmarks for the global prices of oil: Brent and West Texas Intermediate. Brent crude is produced from 15 different fields in the North Sea. Up to two-thirds of the world's oil contracts are for Brent crude. WTI oil is produced from oil fields mainly in Texas, Louisiana, and North Dakota. It is called “light sweet crude” because of its low gravity and low sulfur content. These characteristics make it less expensive to manufacture. WTI is the main benchmark for oil consumed in the United States.
Oil investing methods
Oil can be traded with products that are suitable for both long- and short-term investments, buying and selling the underlying asset, or using a trading platform to speculate on price movements. Here are the popular ways you can trade the oil market:
- investing in oil CFDs
- investing in oil Futures
- investing in oil Options
- investing in oil ETFs
- investing in oil Stocks
Characteristics of oil trading methods
Contracts for difference
A contract for difference (CFD) is an agreement between the trader and the financial services provider. You open both long and short positions, betting that the price of oil will rise or fall. CFD financial services providers usually do not charge commission costs, but earn money from the spread, which is the difference between the bid and ask prices. Trading CFDs allows you to trade oil with leverage, allowing you to make larger trades with less capital.
However, just like trading oil with credit contracts, you have a greater chance of making more money if the price of your oil contract rises, it can also increase the size of your losses if the price of your oil trading contract decreases.
Oil futures
An oil futures contract is a contract to exchange a set amount of oil at a set price at a specified time at a future price. You can use oil futures contracts to hedge price fluctuations. A pricing model for futures contracts than for some other trading methods. However, unexpected future events can cause large price swings that can hurt your trading. Futures contracts have an expiration date, so the contract price for an oil contract may become less attractive as the closing date approaches.
Oil options
Oil options allow you to buy or sell oil in the future at a set price. Oil options do not have a hard contract, which means you have the option not to buy or sell if you want. Trading with leverage gives you the chance to make big profits using less capital.
You can go long or short on your options trades, which means you can bet that the price of oil will rise or fall. But options contain time value that is constantly decreasing, so you have to be right for a certain amount of time. Transaction fees for options trading are generally higher than for other forms of oil trading.
Oil ETFS
An ETF (Exchange-Traded Fund) is a type of investment that includes multiple assets, including oil stocks, and is traded on exchanges in much the same way as stocks are traded. By investing in many different oil stocks at the same time, you diversify your risk. Low management fees reduce costs. However, if the price of a particular oil share skyrockets, you will make more money owning that stock than with an ETF filled with various oil stocks.
Oil stocks
Instead of having many various oil ETFs, you can simply buy oil company shares. As oil prices have become more volatile in recent years, you can make great strides quickly and quickly if you become an experienced swing trader. Since oil is a valuable commodity around the world, owning oil reserves allows you to profit from virtually any market conditions. If you happen to be wrong about the oil stocks you buy, you are more likely to suffer a bigger loss than if you just bought an oil ETF.
CFD Oil trading specifics
CFDs allow you to trade on changing futures and options prices, but without buying and selling the contracts themselves. And instead of trading on a commodity exchange, you create an account with a leveraged vendor. This gives oil traders several benefits.
Unlike futures trading, there is no need to buy several barrels of oil, you can use smaller volumes for trading. This type of trading is great for intraday trading due to the strong volatility in oil: you can make money on the entire movement from the point of opening a position until the moment of exiting it. Therefore, it turns out that trading oil CFDs has many positive aspects, and due to leverage, you can get significant profits from small deposit amounts. Besides, trading oil CFDs you can enter both long and short positions in many oil markets on one platform and you do not have to be a professional to get started.
What drives oil prices?
Oil is one of the world's most actively traded commodities. Here are the key factors affecting the price of oil:
- Extraction and refining. The extraction and processing of oil are very expensive. Since oil reserves are located deep underground, it takes a significant effort to extract oil from the earth. Any technological progress or decline in the production process directly affects the price of oil.
- Consumption and demand. The United States is the leading oil consumer, followed by Japan, China, and industrialized European countries such as Germany and the UK. These countries place high demands on oil for their industrial and economic functions, and therefore their industrial needs can influence world oil prices.
- Availability and supply. Affordability, regardless of supply, can be influenced by political and economic factors. Rising inflation, unemployment, and poverty can lead to lower consumption levels, making the product inaccessible or inaccessible to those affected. Political unrest and riots can also lead to reduced oil imports and theft of imported goods.
- Natural disasters and accidents. Natural disasters are unpredictable events and the damage they cause to affected drilling sites and refineries can hinder and slow down the rate of oil production. Firefighters and mechanical failure Equalities or breakdowns also cause production delays during the recovery period. The delays that these circumstances may cause will lead to a reduction in the supply of oil and, therefore, to an increase in the price.
Why invest in oil?
People can trade oil for a variety of reasons, which depend on the experience and goals of the trader. Some traders may choose the following targets for trading oil:
- Traders looking to add a highly volatile commodity to their portfolio can choose a high-risk, high-return commodity such as oil.
- Commodity prices often fluctuate dramatically; trading oil futures and financial derivatives like CFDs can be a way to profit from volatile oil prices. Oil prices usually change by 5% in one day. Traders should be aware that this kind of volatility carries equal risk.
Conclusion
Oil is the main source of energy in the global economy, making it a very popular commodity to trade. It is a natural fossil fuel that can be processed into various products such as gasoline, diesel, lubricants, wax, and other petrochemicals. It is in high demand, sold in high volumes, and is extremely liquid. Thus, oil trading involves tight spreads, clear charting patterns, and high volatility.
Trading oil one should consider that there are strong external factors that can exert serious pressure on oil prices. Through CFD trading, the investor gets the opportunity to fully trade Brent and WTI crude oil with leverage and small contracts that do not require large investments and allow them to make money on oil. The commodity market is prone to high volatility, so a simple oil trading system can give good profits in times of strong movements, which will happen quite often. However, one should not forget about capital management and control the potential risks of such a trading method.
FAQ
How can i invest in oil with little money?
There are various ways to invest in oil, but they differ by the number of funds needed to start. Having a little start-up capital, it is better to choose oil CFDs. Oil CFDs is considered the most accessible way of investing in oil and does not require buying actual barrels, as contacts are purchased through financial services providers.
How do i start trading oil cfds?
To start trading CFDs you should first determine your trading goals and choose a reliable financial services provider offering CFD as a trading tool. InvestLite is a legit platform that provides safe CFD services, and to start trading oil CFDs, you should simply create an account and make a deposit to get a full package of conditions for trading oil.
