May 24, 2023
It’s one of the world’s most vital hard commodities, powering energy and transport all around the globe. If you’ve wondered how to trade oil yourself, it becomes clear that this finite resource emerges as one of the most appealing trading instruments if you navigate the price fluctuations of supply and demand effectively.
In order to do so, though, you’ll need to understand what oil trading is and the different ways you can invest in this volatile asset for both the short and the long term.
In this article, we’ll break down what oil trading involves and the steps for how to trade oil as an individual investor.
Step 1: Learn what oil trading is
Understanding oil trading means understanding the resource itself. So, let’s first define what this asset is. Oil is a kind of hard commodity, which is a natural resource mined, collected or extracted from the earth.
In its least refined form, this asset is known as crude oil. There are different types of crude oil that are categorised according to where they originate from geographically.
Two primary types are Brent Crude Oil, originating from the North Sea, and West Texas Intermediate (WTI) Crude Oil, originating from oil fields mainly in Texas, Louisiana and North Dakota. Both types of crude oil are preferred for being more ‘sweet’ than other types of crude, making production and refinement cheaper.
As you’re probably aware, oil is necessary for the creation of diesel, gasoline and other petrochemicals, making it the world’s primary energy source — and thus is in high demand globally.
There are several ways to trade oil, which have different pros and cons, depending on the kind of investment you want to make:
- Oil futures — Futures contracts are speculative contracts requiring two parties to agree to exchange an asset at a set price on a certain date. Oil futures are traded on exchanges and are one of the most popular methods of trading oil, allowing investors to trade rising and falling prices. Brent Crude Oil is traded on the Intercontinental Exchange (ICE), and WTI Crude is traded on the New York Mercantile Exchange (NYMEX).
Oil futures are a mechanism that lets companies lock in an advantageous price for oil and provide a theoretical buffer against unfavourable price movements. Speculative traders may also prefer to trade oil futures because they don’t require taking possession of any physical assets themselves. Trades are made by betting on the price movement of the asset, not the asset’s value itself.
- Oil spot price — Unlike oil futures, which set a price for a date in the future, oil spot prices represent the value of the commodity at the point at which the trade is made — ‘on the spot’ — as it were. There’s still some speculation involved with oil spot price trading because you’re betting that the market will rise or fall in a favourable way for you after you make your trade. However, the price at the time of the trade is not speculative; it’s the current market price.
- Oil options — Oil options allow you to buy or sell the right to trade oil at a fixed price — but without any obligation, if you don’t want to. It’s entirely up to you if you exercise your option. Options are divided into two categories: calls and puts. A call option is your go-to if the market is set to rise. If a market fall is expected, a put option is what you’d buy.
If you want to take an opposing position, you can also sell options in these circumstances. When the market is quiet, selling your options can generate some handy income, but there’s an element of risk involved — if the market turns against you, you may end up losing more.
Oil futures and options will both expire at a nominated date, while oil spot prices do not. One way to trade all these, which offers more flexibility, is with oil CFDs (or contracts for difference) — a financial derivative that doesn’t require you to accept the same obligations trading in oil futures entails.
Step 2: Learn what factors affect the price of oil
So now you know what types of oil trading are out there; it’s time to cover what can cause the price of oil to move. As we’ve mentioned, oil is a potentially very profitable asset due to its volatility. In order to harness that potential, you need to be prepared for major fluctuations in the market.
Just some of the factors that may cause the price of oil to sharply rise or fall include:
- Seasons of demand
- Economic growth
- Population increases
- Natural disasters
- Geopolitical conflict and war and civil unrest
- The cost of freight and shipping options
- Other issues of supply and demand, like the rise of renewable energies
You’ll not only need to have a good overview of these factors, but you’ll also have to keep an eye on breaking news and key price levels in order to make informed oil trades of Brent Crude Oil, WTI Crude Oil, heating oil and no lead gasoline.
One upside to learning how to trade oil is that it is traded in such large volumes that there is plenty of data — and therefore expert analysis of this data — that you can dive into to better understand the market. This analysis falls into two categories: fundamental and technical analysis.
- Fundamental analysis — Think of this as the analysis concerned with breaking news and contextual information. Fundamental analysis of oil trading can be news announcements of oil spills, production shortages or corporate acquisitions, company financial statements and analysis of the general economic stability in a particular region. Fundamental analysis may also take the form of op-eds from specialist journalists and columnists in financial news publications.
- Technical analysis — The second part of analysing the market for oil trading is technical analysis. Studying technical aspects of historical price data can help better predict the movements of the market in the future. It encompasses price charts, trendlines, graphs and other market statistics. Technical analysis is predicated on the theory that price charts hold the most salient information about security, that prices move in trends, and that these trends will repeat over time.
Step 3: Start to practise trading oil with a risk-free demonstration account
Once you’ve started to follow oil trading analyses and learned to interpret the data, spot trends and feel more confident in your understanding of the market, you can start to practise making your own trades by opening a risk-free demo account. Here, you can experiment with the decisions you’ll need to make to trade oil before moving into real markets and investments.
Running a demo oil trading account before you jump into live markets can help you test your knowledge and get a feel for the market’s volatility, which can better help you decide how you want to go about oil trading.
For example, some people prefer to engage in day trading, which deals with the relatively smaller fluctuations that occur in a single day of trading from when markets open to when they close. This training period also allows you to familiarise yourself with different platforms. At VT Markets, we use the powerful MT4 and MT5 platforms, which you can download and use on a number of devices, including mobile and PC.
Step 4: Create your trading account
After experimenting and practising trading oil, you’re ready to dive into a live trading environment. Creating a Forex trading account with top-tier authority regulation only takes a few minutes, and you can usually start building up and managing your portfolio the same day.
VT Markets allows you to trade multiple securities and commodities, so whether you want to jump straight into oil trading or diversify with energy trading, the choice is entirely up to you.
Step 5: Find the right opportunity
With plenty of expert knowledge, tools and insider resources at your fingertips, you’ll soon be ready to identify your first opportunity for oil trading. VT Markets offers customers trading tools like expert advice, Forex signals and a detailed economic calendar — as well as daily market analysis so you can track oil’s sometimes volatile movements.
Step 6: Open your first oil trade
Found the right opportunity? It’s time to open your first oil trade. This may be a decision to buy or sell, depending on how oil prices move. No matter what trade you make, you’ll need to carefully balance the risk involved with the move and make sure that you can mitigate risk with various tools.
For example, a stop-loss or limit-close order will protect your trades from dropping below a certain unacceptable level of loss automatically.
Step 7: Develop your strategy and close your position
Once your oil trade has been opened, you can monitor the market’s movements and stay reactive based on breaking news and relevant data. The time you spend riding an open trade through price fluctuations will depend on a number of factors, including whether you want to engage in a long-term or short-term strategy. When you’re ready (or when your stop-loss order is reached), close your position.
There’s no doubt that a lot of study and research is required to understand and successfully navigate oil trades in global markets. Fortunately, with VT Markets, you can access customer support and help you make the most of the powerful trade platforms, tools and analysis available to you.
FAQs
What are the ways to trade oil?
Generally, there are three ways to trade oil; through oil futures, spot price purchasing and oil options. In order to engage with these types of trading, investors can use a number of different methods and derivative products, including crude oil spread betting, oil CFDs (contracts for difference) and oil ETFs (exchange-traded funds).
What is the difference between Brent, WTI and other types of oil?
Not all crude oil is created equal, and some types of crude have a higher density and sulphur percentage, making them more expensive to produce and refine than their ‘lighter’ and ‘sweeter’ counterparts.
Sour crude oil is less in demand and often less valuable than Brent or West Texas Intermediate (WTI) Crude Oils. Brent and WTI are named after specific geographic regions, the North Sea and areas of the U.S., respectively, and they are considered sweet, light crude oils.
Brent Crude is responsible for two-thirds of the world’s global oil supply, and both act as global benchmarks for oil prices in all markets. As well as crude oil, which is used for petrochemical, gasoline and diesel production, it is possible to trade oils used for heating and no lead gasoline.
