Crude Oil Trading Basics: Guide for Beginners

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You do not need to be a prince of the royal family or an oil mogul from the Middle East or any other oil producing country in order to profit from crude oil trading. If you are a retail trader and you are just starting out trading the financial markets, crude oil is one of the assets that you can trade. Like many of the risky commodities out there, the price of crude oil has undergone a lot of volatility and change within the last 9 months of 2020.

All the good things about crude oil trading is that it can be traded on a spot basis using CFD contracts. This allows you to trade contracts that can match your account capital no matter how small, which removes the need to source for large capital to trade. The essence of this article is to showcase crude oil trading basics that all beginner traders should know.

Crude oil is listed as a commodity asset on several forex trading platforms. All commodities traded in the markets are priced in US Dollars, so it is not unusual to see crude oil and other commodities paired against the US dollar. Two varieties of crude oil are traded in the financial markets. One of these is the West Texas Intermediae blend, which is the crude oil blend obtained from the United States and commonly known as the USOil CFD asset, while the other is the international benchmark known as the Brent Crude blend, also known as the UKOil CFD asset. The symbol for crude oil is usually written as the short form of the name of the blend. Depending on your brokerage, you may see West Texas Intermediate written as WTI, USOil, etc. The international benchmark is written as Brent, UKOil or any other nomenclature assigned by your broker.

Crude oil trading also has its own unique methodology based on the fundamentals and characteristics of the asset. It is also known as the black gold, but does not share the same fundamentals as gold.

What Makes Crude Suitable for Trading?

Crude oil is listed as an energy commodity. It is known as a risky commodity, because the price rises when the sentiment in the market is one of assuming risk, also known as the risk-on sentiment. Crude oil prices typically drop when there is economic upheaval and a flight to safety. Therefore, crude oil and gold tend to move in opposite directions.

What makes crude oil suitable for trading?

  1. The price of crude oil is very sensitive to the forces of demand and supply. This is what determines prices and price direction, enabling traders to buy if they expect prices to rise, or short the asset if prices are expected to fall.
  2. Crude oil is a liquid asset. The global demand for crude oil means that there is a lot of volume of trade that goes on in crude. This makes it easy to find buyers and sellers in sufficient volumes, providing rapid order fulfilment.
  3. Crude oil has tremendous economic value and future benefits. Wars have been fought over oil (Gulf War of 1991 in which Iraq seized oil fields belonging to Kuwait, leading to a war that eventually led to the defeat of Iraq). There are as many as 64 derivatives of crude oil that have domestic, industrial and commercial usage.
  4. Crude oil is a highly volatile asset. This volatility creates large price differentials on a minute-by-minute basis and creates trading opportunities.

Crude Oil Trading in the Financial Markets

On retail trading platforms, crude oil is mostly traded on a spot basis, using CFD contracts. It can also be traded as a futures or options asset. A CFD contract allows the trader to buy or sell contracts on crude oil without owning a barrel of the asset, or an oil tanker. This provides retail traders with a better and cheaper way of trading crude oil. With a CFD contract, you can trade crude oil on the basis of its price differential. The profit or loss is calculated from your lot size and the price difference.

Characteristics of Crude Oil CFD Trading

As a beginner trader, what can you expect?

  • Crude oil trading is leveraged. You can start trading gold with as little as $100 in your trading account. The leverage on EU/UK platforms is 1:10, while on offshore platforms it is up to 1:500.
  • Crude oil is traded in lots. You can trade as low as 0.01 lots.
  • You can profit from rising prices by buying crude oil, and from falling prices from selling/going short on crude oil.

The Act of Crude Trading

Crude oil can be traded using fundamental analysis and technical analysis.

The main fundamental driver of gold prices is politics and the economics of production. Political upheaval in the production spots of the world can affect the supply of the asset.  during the Libyan Civil War of 2011, the price of crude oil crude from $22 a barrel to as high as $140. In 2020, the COVID-19 pandemic has made the demand factor the more important factor in determining the price of crude oil. As demand from China and other countries dropped due to closure of factories to contain the spread of COVID-19, storage facilities were overwhelmed with unused products, leading to a crash in prices.

Crude oil price performance depends also on the state of the global economy. When there is risk-off sentiment, investment money shifts away from crude oil into less risky assets such as gold. Crude oil prices tend to fall during these times. When the global economy is doing well, the markets assume risk-on sentiment and crude oil prices tend to rise.

Crude Oil Price Progression: 2009 - 2020

Crude Oil Price Progression: 2009 – 2020

Procedures for Trading Crude Oil

Step 1: Fill the account opening form online with a broker that offers crude oil trading under the energies asset index. and get your account verified by submitting a utility bill/bank account statement AND a drivers’ license/international passport).

Best Brokers for Oil Trading With low minimum deposits

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Step 2: Once the account is verified, fund it and start trading with a working strategy.

Crude Oil Trading Basics: Guide for Beginners

Crude oil price quote

Look at the snapshot above.

  • On this broker’s platform, 1 lot = 100 barrels.
  • The minimum trade size is 0.1 lots (1 mini-lot) or 10 barrels.
  • A barrel costs 42.74/42.77. This means that the spread is 0.03 points.
  • If a barrel costs 42.74 (for short trades) and 42.77 for long trades, then 0.1 lots will cost 10 X 42.74 or 10 X 42.77, which is $427.4/427.7 for a trade.
  • Using a leverage of 1:100, it means that it will only cost $4.24/$4.27 to set up a trade.
  • If you buy at a price of 42.77 (ask price) and price rises to 43.77, and you trade 0.1 lots, your profit is 43.77- 42.77 X 10 barrels (0.1 lots) = $10.
  • If you remove the spread, then your profit is 10 – (0.03 X10) = $9.70

Leverage enables you to start trading crude oil with just $200 in your account.

Best Brokers with High Leverage for Oil Trading Online

BrokerInfoBonusOpen Account
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Spread: From 0.2 Pips
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Spread: From 0 Pips
Leverage: 888:1 “*This leverage does not apply to all the entities of XM group.”
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