What you need to know about oil trading
Information is not investment advice.
What comes to your mind first when you hear or read about the incredible wealth?
Just a couple of centuries ago, it would have definitely been gold or jewelry, but everything has changed dramatically. Nowadays, fabulous wealth is associated mainly with oil. The importance of crude oil can hardly be overestimated as it is considered to be the most significant energy resource and financial instrument in the world.
Surely it's not stretching a point too far to say, that crude oil is not only one of the most volatile commodities in the world, but it is also one of the most commonly traded.
The price of oil remains to be a critical global economic factor, which means that trading is influenced by political and commercial concerns. This is because crude oil remains a major source of energy for the world.
Do you know?
• There are a lot of important uses for crude oil besides energy resources production. It is widely used for manufacturing of plastics, non-flammable clothing, furniture, heat insulation, kitchen items, pharmaceuticals and even food.
• Two of the major classifications for crude oil are US Oil, commonly referred to as West Texas Intermediate (WTI) and UK Oil, or Brent Blend. These are both characterized as being “light” and “sweet” crude oils, meaning they have a low density and are easier to refine and transport. Therefore, they tend to be more expensive than their “heavy” or “sour” counterparts as they are closer to the desired finished products noted above.
• It is estimated that 90 million barrels of crude oil is consumed globally every single day.
There are several financial avenues to trade oil including Stocks and Forex market:
1. One way you can invest in oil is to buy stocks of companies involved in the oil industry. The most known and promising stocks that are worth to buy: Exxon Mobil (XOM), PetroChina (NYSE: PTR) and Royal Dutch Shell (NYSE: RDS.B).
It’s important to keep in mind that although there is usually a correlation between the price of crude and oil company profitability, this isn’t always the case, and disasters like the oil spill can do serious damage to an otherwise solid investment. Oil itself is riskier than most investors are prepared to deal with. It is not an investment for people with risk aversion.
2. Another way is Forex Oil trading, which has been the most lucrative method of investing following the financial meltdown of global share markets. Crude Oil is an important source of diversification that Forex traders can use.
Main features of Forex Oil trading:
• It is possible to trade both WTI and Brent Crude Oil on different Forex platforms. Brent blend makes up more than half of the world's globally traded supply of Crude Oil. FBS offers you an opportunity to trade [Brent Crude Oil (BRN)] and [WTI]. You can now enter the market which holds the whole world in constant anticipation.
• Some platforms trade CFDs in oil, and then you trade the contract just as you would a currency pair. CFD means «contracts for difference». They are the OTC financial instruments that involve a cash payment and have an expiration date. These contracts are traded as currency pairs but have different margin and leverage. One contract for oil delivery expresses the value of 100 barrels of oil in dollars.
• Oil is generally traded against the US dollar, as Crude Oil is priced in US Dollars so far. Because of the US Dollar pricing of Crude Oil, the exchange rate of the US Dollar plays an important role in the day to day pricing of Crude Oil. At the most basic level, a weaker US Dollar tends to see a rise in Crude Oil prices, while a stronger US Dollar results in Crude Oil prices falling.
• The market is limited by time on some platforms Oil trading hours are limited to between 02:00 and 21:00 London time on some platforms, as these platforms offer access to specific buyer/seller contracts.
If you are determined to get involved in the Crude Oil market, you should understand that it is extremely volatile. Prices can be impacted by many different factors and they can shoot up, or down, quickly. Beyond any doubt, volatile instruments can be risky. Crude oil as an asset bares quite a lot of risk, but due to its unique standing within the world’s economic and political systems, it gives traders a lot of opportunities to besten their market performance.
In this way, having clear understanding of how the Oil commodity markets work, and more importantly the fundamentals that shape the day to day prices in Oil, traders would be at a much better advantage to trade Oil incredibly successful!