Oil is more than an energy resource. It is used for plastics, pharmaceuticals, and countless consumer goods. This fossil fuel is always in demand. Like gold, it allows traders to profit from price speculation. Discover the basics of trading oil today.
Through oil CFDs, you can capitalize on market movements. No physical barrels change hands. Unlike futures, these instruments are not even linked to delivery. All you need is knowledge, analytical skills, and software.
How to Trade Oil on Forex With CFDs
The Contract for Difference is a special kind of derivative. Its holder may profit from oil pricing indirectly. As the term suggests, it is an agreement. The parties are the client and the broker, and the subject is price change. CFDs may be linked to different underlying assets. These include benchmark crude grades (e.g., Brent or WTI).
When traders buy or sell CFDs, they essentially bet on market movements. The value of CFDs depends on the oil price. The logic is similar to Forex trading. You buy rising instruments and sell the ones you expect to fall. You may access oil CFDs through most trading terminals for Forex.
How to trade oil on Olymp Trade Forex? You need to make accurate forecasts using a range of analytical tools. It is important to understand what drives the commodity market. Its swings and your ability to foresee them determine the result. You cannot skip the theory if you want to make money on oil Forex trades.
Fundamentals of Pricing
Pricing of futures on the Intercontinental and New York Mercantile Exchanges is the basis. Futures are also derivatives, but they are connected to physical delivery. CFDs are more accessible in general. They are easier to trade online.
Secondly, entry is much more affordable. For instance, you may purchase a Brent CFD for just 25 barrels. In comparison, a standard futures contract is for 1,000 barrels. In addition, CFDs are highly leveraged, so you can trade larger volumes than what your balance can buy.
Brent and WTI
There is more than one type of crude oil. Oil extracted in different regions has different properties. It also goes by different names. For example, Russia produces Urals, UAE makes Dubai Crude, Nigeria sells Bonny Light, etc.
Overall, there are 160+ types! Pricing for most of them is linked to two benchmark types: Brent and WTI. The former is produced in the North Sea region. This includes the Norwegian and Scottish shelf blocks of Brent, Ekofisk, Oseberg, and Forties. West Texas Intermediate comes from the USA.
Therefore, traders need several charts to make decisions. There are CFDs on Brent and CFDs on WTI. The former is connected to a basket of 15 oil grades and serves as the standard for the European and Asian markets.
WTI is the standard across the Atlantic. It comes from the oil fields scattered across the USA. The largest reserves are in Texas, Louisiana, and North Dakota. Other common questions are:
- What is the trading symbol for oil? The oil Forex symbol is USOIL for WTI and UKOIL for Brent.
- What time does oil market open? Futures on WTI are traded daily from 11 p.m. to 10 p.m. (GMT). Spot contracts are traded from 11 p.m. on Sunday to 10 p.m. on Friday. For Brent, spot hours are the same. Futures are traded between 1 a.m. and 11 p.m.
Overview of Factors
Aside from the location, each benchmark has a special chemical formula and therefore properties. Brent and WTI are marked by different viscosity, density, etc. Generally, the American benchmark is cheaper, but the price gap is small. The factors that affect pricing are also similar. To see how trading oil Forex market works, one should know what drives it.
Demand and Supply
These are two fundamental economic forces. They affect every market. Higher demand causes prices to surge, and vice versa. The less popular an asset is – the cheaper it is. Rising supply causes depreciation, and scarcity boosts value. Traders need to understand what drives both demand and supply for their underlying benchmark.
Some countries export oil and others import it. If the economies of the buyers weaken, they consume less oil, which drives its price down. Like demand, supply is a primary factor affecting all other drivers.
On the other hand, supply may also dry up. Regions produce less crude oil when they are affected by military conflicts, sanctions, problems with oil extraction, etc. Supply may also rise, but such changes are usually negotiated by groups of oil-exporting nations, such as OPEC. A country may not ramp up production independently by its own volition.
Uncertainties, conflicts, and sanctions affect the price of the resource. Any news about oil producers may do the same. The logic here is straightforward. Conflicts lead to cuts of the supply, and declining supply boosts value. All you need to do is to follow the news and be aware of what is happening globally.
The oil market is extremely sensitive to news concerning fossil fuel. Even if it expects a shortage of supply, prices jump immediately. When plans to increase it are announced, they fall.
All too often, this happens without confirmation in the form of solid data. The market sentiment alone is powerful enough. Generally, the most effective investment strategy is to follow the sentiment. Oil producers also take advantage of its effects. Political tensions and negotiations cause expectations that can sway the prices. Therefore, the market is always in flux.
How to Predict Changes
Media information is your primary source. Follow the news to spot events that trigger price changes. Pay attention to oil producers within and beyond the OPEC: USA, Russia, UAE, etc.
Secondly, pay attention to reports, especially reports by the OPEC and the US Energy Information Administration. The latter contains an analysis of supply and demand in this market. The organization publishes data on crude oil reserves every week, so check your economic calendar. There are also different kinds of demand/supply forecasts on its official site.
Opportunities in the Market
The first reason for the appeal of oil trading is high volatility. This attracts hordes of speculators. As daily changes can be significant, the profit potential is high. Investors should also accept high risks, as the same feature can bring magnified losses. Therefore, risk management is paramount.
This market is always changing quickly. You will never feel bored if you invest in it. The media supply news daily, causing crude oil prices to rise or fall. If you are a risk-taker by nature, oil trading could be exactly what you need.
Key Takeaways: Trading Oil
Over 160 grades of crude oil exist. Usually, investors talk about the benchmarks – WTI and Brent. Their prices never stand still. This market shows high volatility as it is very responsive to news events.
The market moves up or down based on supply and demand, and mere expectations. Traders can find valuable insights from official reports by oil-producing nations. The US Energy Information Administration and OPEC are two crucial sources.
An investor should learn to detect market sentiment. It can bring a sizable profit. Learn to trade in this changeable environment. Manage your risks to stay in the black.