Oil trading — particularly crude oil trading — is one of the most recognisable forms of market activity worldwide. Like gold and other age-old commodities, there is a global consensus on the value of oil, and all countries have a stake in this market — either as exporters or as importers of the resource.
Let’s look at how to trade crude oil in more detail, examine how this market works and discuss where to trade oil.
Before you can start trading oil, you first need the ways you can invest in the asset. The four common methods are:
- Speculating with contracts for difference (CFDs)
Investors take out CFDs on a crude oil stock or index and then receive a profit or sustain a loss, depending on which way the market moves. The trader does not take ownership of the asset and simply speculates its movement through leverage.
- Speculating on oil-adjacent businesses
Shipping, piping, drilling and distribution companies heavily depend on oil prices, and many of these businesses will be publicly floated on exchanges. Traders can speculate on how the stock or index price will move within these companies.
- Buying shares in oil-adjacent businesses
It is also possible to buy shares in the abovementioned oil-adjacent businesses. This will be a longer-term strategy than a trading and speculation approach and may require more capital upfront, as you’ll need to buy the shares outright.
- Investing in oil directly
It is possible to buy oil directly, and many large-scale businesses will utilise this approach. This option may be unachievable for most independent traders, as it requires too much capital to trade in oil this way.
Let’s look at some key factors that attract people to the oil market:
- A highly liquid market
You can execute trades and positions quickly, buying and selling without delay.
- A good level of volatility
Volatile markets feature higher profit potential, although there are always risks.
- Enhanced volatility with leverage
Most oil trades will be conducted with leverage, further increasing the profit potential while also increasing the risk.
- Relatively tight spreads on trades
As the spreads on oil trades tend to be narrow compared to other markets, traders can open positions relatively cheaply.
- Plenty of options and derivatives available
Spot trading, futures and forwards can all help to diversify your strategy.
- Lots of scope for market research
Geopolitical and economic factors have all influenced the price of oil in the past, and there is plenty of information for traders who wish to research the market.
The price of oil is influenced by three core factors:
- Supply and demand
Like other commodities, the price of oil is determined by the supply and demand in the market. The Organisation for Petroleum Exporting Countries (OPEC) controls around 40% of the world’s oil supply, which can affect prices.
- Cost of production
The cost to extract and produce oil can also have a direct impact on prices.
- Market sentiment
This refers to the attitude investors have towards a particular asset, which can indicate a bullish or bearish market.
The most common method would be to use CFDs via a brokerage account with TMGM. Here’s how to get started:
To buy oil shares and commodities, you’ll need to go through a broker or speak to a financial advisor. This third party will be able to help you make direct investments into the oil market — a strategy that will involve taking ownership of stocks and shares or even the commodity itself in some cases.
In a longer-term view, oil prices tend to be low in March and June each year — ideal for traders looking to open a long position. At the opposite end of the spectrum, October tends to see the highest prices for trading oil across the year, so this might be the season for going short or opening a selling position.
However, other aspects influence the price of oil. The Organisation for Petroleum Exporting Countries (OPEC) can exert some cooperative control over the market value of oil. By working together, these countries influence the per-barrel price of oil.