CFD refers to a deal made between a buyer and a seller, not to trade the actual product but a deal on the difference in the price of the product (CDF = Contract For Difference). Trading CFDs on commodities such as crude oil requires investors to speculate about the up and down movements in price of the trading instrument. In contrast to buying oil, CFDs on commodities allows the trader not actually purchasing the underlying asset and not taking delivery of it. What a trade is doing is taking either a short or a long position, depending on whether he or she thinks the market will go up or down.
Means, the trader will take a short position if he thinks the price will decrease, or a long position if he thinks the price will increase. If the speculation was correct – a profit is made. This structure allows the traders to benefit from greater flexibility. It gives him better chances to profit from the market movement.
Frequently Traded Commodity
Oil is actually the most traded commodity! Another commonly traded commodities are precious metals: gold, silver and copper. Oil considered to be an energy beside natural gas. Another group of commodities called “soft commodities” include cocoa, coffee, cannabis and sugar.
How to start trading CFD
First to thing to do is research – find out about the available commodities and their volume of trade. Your choice will also be made based on the price of the unit of the commodity. After you have established on which commodity you want to trade, you will have to decide the size of your preferred deal. This is determined by the leverage which allows you to trade with a bigger volume than your initial deposit. Checking predictions and analysis will help you to determine whether to take long or short position. You want to open a long position if you believe that the price of the oil will rise and a short position if you believe it will fall.
Trading CFDs on Oil
As we know, crude oil, or petroleum, is a fossil fuel formed as a result of the activities of bacteria on the remains of plants and algae. As this continues for millions of years with heat and density, these components transform into carbon. Thus, we have a mixture of hydrocarbons and cyclo-paraffin deposited in deep rock strata or scarcely near the earth's surface. To successfully trade CFDs on oil, you must understand factors influencing the demands for oil.
The transportation sector is the largest consumer of oil and indicators show that things are not likely to change until 2040. This is followed by the construction industry consisting of cement, glass, iron, and steel. Sectorial industry and agriculture are the third and fourth consumers. Anyone trading CFDs on oil should also take note of the factors influencing the price movement. These include:
- Oil demand
- Current supply
- Future supply
- World crises
- Natural and man-made disasters, and
- Currency strengths
A word about the Saudi Aramco IPO
When the world’s largest oil producer goes public, it will definitely create a new dynamic for all the players in the oil market. In today's unstable economy, it may sometimes be hard to feel confident about making investment decisions. Therefore, as mentioned above, investing in CFDs can be a great idea. They provide you with greater liquidity and easier implementation ensuring that you cover all possible market movements. By trading on the CFDs, you can profit from any movement, whether up or down, in Saudi Aramco’s stock price. Another benefit of trading Saudi Aramco’s IPO with CFDs is leverage. Trading with leverage allows you to open considerably larger positions in a trade while depositing small initial fund.