Learn How to Trade Crude Oil in Simple Steps

Oil trading is the process of selling or buying oil in order to profit from price changes. Due to its finite feature, prices of crude oil are highly vulnerable to supply and demand changes. Oil traders always keep an eye on supply and demand imbalances to make the most out of price fluctuations. 

Both technical and fundamental analysis are essential when it comes to the oil market. Historical trends and price movements are no less important than market fundamentals and drivers of both supply and demand. 

West Texas Intermediate (WTI) and Brent crude are the two most common types of crude oil and are used as benchmarks for global oil prices. Traders have a variety of oil investment options that come with different levels of risk and market exposure. Crude oil CFDs are a popular investment choice for traders through which they can speculate on prices without having to own physical oil barrels.

• Spot Oil Prices: reflect the current price at which oil can be sold or bought for immediate or on the spot transactions. 

• Oil Futures: are contracts of an agreement to buy or sell a set amount of oil at a set price on a set date. Prices of futures contracts reflect the expected oil price on the expiry date of the contract. Futures act as a hedging tool against higher prices. 

• Oil Options: similar to futures, options provide traders with the right to exchange a set amount of oil at a set price on a set date, with no obligation to do so. If a trader expects prices to rise, then a call option is chosen. On the other hand, when prices are expected to fall, a put option is set. 

What affects Crude Oil Prices？ 

Crude oil prices are broadly determined by the relationship between supply and demand and are driven by three main forces:

Supply and Demand 

Supply: Production levels are the main price driver when it comes to oil. This explains why OPEC+ decided to curb supply to support prices. 

Demand: Global demand trends directly influence price movements. The United States, China and Europe dominate the global demand consuming around 45 million crude oil barrels per day. 

Price Speculations and Geopolitical Tensions

Oil prices are based on the future market, meaning that market speculation about potential events and trends could have a direct impact on oil prices. Turbulence in oil-producing countries dramatically increases oil prices as traders worry the crisis will limit oil supply, which may lead to higher demand and price levels. 

Unexpected events can also have a huge impact on prices. In 2020, when economies got stuck in lockdown in the wake of pandemic outbreak oil prices began to fall dramatically. Oil consumption averaged 94.4 mpd in Q1 2020 down 5.6 mbp from the prior year. 

The sharp drop in global demand was even worsened by the supply glut. Producers increased output to keep their market share. By April, crude oil crashed into the negative territory for the first time ever. WTI barrel traded at -$37. Shortly after, prices managed to rebound gradually as the global economy reopened and demand began to rise. Meanwhile, production cuts help to restore the balance between supply and demand. 

Recently, the rising political tension between Russia and Ukraine pushed crude oil prices to the highest levels in 8 years.

Five Reasons to Invest in Oil This Year 

• Robust global demand: the economic recovery following the pandemic-caused setback results in growing global demand as economies reopen and back to full production capacity. 

• Low production capacity: production restrictions among OPEC countries and allies amid rising demand boost oil prices. 

• Ongoing geopolitical tensions: the recent geopolitical tensions between Russia and Ukraine fueled the crude oil price rally reaching a high of $97 for the first time since 2014.

• Limited sector investments due to Covid-19 concerns: despite the economic expansion seen in most countries, concerns over the emergence of new pandemic variants are still a major headwind to oil investments worldwide. 

• Prices are expected to overshoot $100: in light of the above factors, economists are widely expecting oil prices to overshoot this year unless there is a supply increase decided by the top oil-producing countries, and specifically the OPEC. 

How to Start Oil Trading

You can start trading oil by following these simple steps.

• Learn about oil market fundamentals. 

• Decide how you want to trade oil. Choose between oil CFDs, futures, options or spots. 

• Choose a reliable broker. Here are some tips for choosing the best forex broker. 

• Open a forex account and find a trading opportunity. 

Original Article:   Top Crude Oil Trading Tips and Strategies

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers' personal circumstances, investment experience, or current financial situation.