How to trade and invest in Oil

An introduction to oil

Crude oil, or petroleum, is quite literally the commodity that keeps the lights burning and the wheels turning in the global economy. It is a fossil fuel, that was laid down millions of years ago, it’s used both as a source of power and as an essential ingredient in many manufacturing processes.

Oil is found across the globe there are significant deposits in both North and South America, Russia, West Africa and other regions. However, oil is most closely associated with the Middle East and the states around the Persian Gulf where it’s been both a source of riches and political instability for the last 100 years.

Best brokers for trading Oil

Which broker is best for your trading and investment in oil will largely depend on how and what you want to trade and invest in.

If trading is what you are interested in, then MT5 or MT4 brokers should be on the list that’s because many of them offer CFDs and charts on both Brent and WTI.

They quote and chart continuous rolling prices. Meaning that traders don’t have to worry about contract expiries and delivery months. Instead, they can focus on price action and trends, and take advantage of the built-in indicators and chart functionality that Meta trader offers.

If you’re looking to trade a more extensive range of oil-related instruments or indeed to invest in oil-related assets for the long term, then you will probably want to consider a more full-service firm such as CMC Markets, Saxo Capital Markets or indeed IG.

All three of which offer access to thousands of different instruments though smaller rivals such as Spreadex and XTB also provide access to 15,000 individual markets.

You can compare brokers, and decide which one is the best for you using our comparison tables. For Trading accounts click here and for Spread betting click here or if you are interested in investing through ETFs use this link. But why not read the rest of the article before you do.

Compare best brokers for trading oil here:

Oil futures explained

Oil is one of the worlds most actively traded commodities, global demand for oil is expected to reach 100 Million Barrels Per Day, or BPD by 2020, up by around +5 million BPD since 2015. That’s despite the increasing use of renewable sources of energy such as solar and wind.

Oil prices can fluctuate significantly, and both producers and consumers of oil wish to protect themselves from large price movements, to fix their costs and plan ahead.

One way for them to achieve this is through the futures markets.

Futures contracts are derivatives that allow traders, producers and end-users to speculate on the future price of a commodity, in this instance, the future price of crude oil.

Futures prices reflect market expectations for the price of oil at a given point in the future.

Oil futures trade on a monthly basis out to or five or even ten years ahead, although in practice there is little if any trade more than two years out.

Oil futures prices vary month to month, and the variation in those prices creates what is known as a futures price curve. There are also many varieties or grades of crude oil. The two most widely traded as futures contracts, are WTI or West Texas Intermediate Crude and Brent Crude.

WTI is a US-centric contract while Brent is associated with Europe and the Middle East.

Oil futures contracts are usually deliverable, and each contract represents 1,000 barrels of oil. Each notional barrel would contain just under 159 litres of oil. So one oil futures contract controls almost 159,000 litres of crude.

Oil CFD trading explained

Taking and making delivery of physical oil is all well and good for large producers and consumers, perhaps an oil major and a chemical company say. However, for a large number of market participants, that’s not a practical proposition or one they need to be involved in.

After all, if your only interest is the rise and fall in the price of oil, then you will have little use for the end product or means to store it. That distinction was not lost on the oil futures markets, and they introduced the possibility of cash settlement rather than physical delivery.

The definition of a CFD or Contract for Differences is a contract between two counterparties that is settled in cash at the end of the contract lifetime and not the underlying instrument the contract is over.

Cash settled or not, an oil futures contract value is around US$60,000 (at the time of writing), and it has a finite lifespan.

Whereas an OTC or “Over The Counter” CFD, traded with a dedicated CFD broker, offers much more flexibility in terms of contract size and duration. For example, contract sizes of just 100 barrels, that do not expire and that can be held for as long or short a time as the trader requires.

When a CFD contract is closed, the trader either pays or receives a cash sum based on the realised profit and loss of their trade. If they have lost money, they are debited and pay that loss away, if they have made money then they receive a credit for that P&L.

Note though that both oil futures and oil CFDs are traded on a margin or geared basis that magnifies both profits and losses there are also financing charges or rollover costs to consider if you hold open positions in oil CFDs for longer than a business day.

Oil spread betting explained

It’s also possible to bet on the rise and fall of the price of oil, thanks to the ingenuity of the UK’s bookmakers via spread betting. Spread bets are very similar in some ways to CFDs they are settled for cash rather than the underlying instrument, in this case, crude oil.

They allow the user to back an oil price rise or bet on an oil price fall. Spread bets on oil will also allow bettors to deal in contracts that are a fraction of the size of the exchange-traded futures, and over a variety of time frames. The significant difference between the types of contract is their tax treatment.

Under current UK legislation, (at the time of writing) profits made from betting by individual UK taxpayers are not subject to tax whereas any profits made through CFD trading are potentially liable for tax.

However, any losses incurred through spread betting cannot be offset against capital gains made elsewhere whereas losses made in CFD may be offset against other capital gains.

Oil ETFs explained

ETFs or Exchange Traded Funds are open-ended funds that aim to replicate the performance of a given instrument, sector or investment style.

For the most part, ETFs offer what is known as passive investing that is they aim to track a particular benchmark or commodity, rather than outperform it. ETFs are tradeable in the same way that individual shares are.

As such ETFs offer a low-cost way for investors to track the rise and fall of major commodities, allowing us to quickly gain exposure to all sorts of global market themes from one account and one product type.

The ETFs, which track oil prices, aim to mirror their performance and they will usually own a basket of oil futures or other derivative contracts on oil and perhaps even physical oil itself to do so.

Investors and traders who are bullish of the oil price would typically buy an ETF while those who are bearish of would usually sell one. It is possible to sell short of an ETF, i.e. sell it in the hopes of repurchasing the position at a lower price for a profit, but it’s best to check the requirements for doing so with your broker before proceeding.

There are more than 20 ETFs and similar products which track Oil prices, though the United States Oil Fund (Ticker USO) is probably the best known and most widely followed among them. USO tracks WTI crude its stablemate the United States Brent Oil Fund (Ticker BNO) tracks Brent crude.

Be aware though that some oil ETFs and ETF type products may be leveraged and or directional in nature.

Where to get streaming oil charts

An excellent place to get price information and charts on oil are the exchanges on which it trades. The CME group a range of price data and charts on WTI or Nymex crude as it’s also known. A free service carries prices which are delayed by 10 minutes, but you can also pay to receive real time quotes.

It’s a similar story for Brent crude whose futures are traded on ICE who provide delayed data feeds and charts for free with the option to subscribe to real-time data.

Most brokers offer real-time charting and price feeds on their dealing platforms, of course.

However, if you want to remain independent of those then services such as Tradingview carry a wealth of price and charting information on oil CFDs, ETFs and other products that track crude prices. Other online alternatives include Barchart.com, Markets Insider.com and Bloomberg.com

What is oil swing trading?

Swing trading is a trading style that aims to identify the beginning or end of trends within the price action of an index or instrument; in this case, in crude oil or derivatives over it.

Swing trading can be a day trading style without positions held overnight, though some swing traders will run positions for more than one trading day if they believe the momentum in the market justifies it.

An oil swing trader is looking for signals within price action to help determine what the medium-term move in crude prices will be.

They will examine front-month prices but will also keep an eye on what’s happening further along the price curve looking for any anomalies.

They may also trade the spreads between delivery months or Brent and WTI crudes if they believe the price differentials between them are out of line and are likely to correct

Signals that will be of interest to swing traders would include an ongoing series of higher highs and higher lows, over multiple time frames of say 5, 10 and 15 minutes, that could suggest there is upside momentum and a new uptrend is in the offing.

While a series of lower highs and lower lows over various time frames, after a good run, could well mean that a move upwards in oil has come to an end and move lower is now likely.

Swing traders will look to identify these trend changes as early as possible. However, they tend to use indicators to provide confirmation and to avoid false breakouts. Swing traders use stop losses to manage their risk and will often trail these behind profitable positions and may add to these as and when the strength of a trend develops or increases.

Oil trading systems  – any good?

There are many oil trading systems out there, but before you part with hard-earned cash to buy one, you should consider what you are getting for your money.

Oil is perhaps the most geopolitically sensitive of all commodities and it is subject to a very long list of price-sensitive factors, that include overall global supply and demand and changes therein, political tensions and sanctions, shipping rates, trade wars and disputes, the rise of alternative energies and renewables — other downstream items such as refinery capacity and the availability and cost of storage.

Some of these factors can affect crude prices immediately, while others may have a more significant impact out into the future and leave front-month prices largely unchanged.

The best advice is to do your homework and ask plenty of questions of any would-be service provider.

How to invest in oil

There are various approaches to investing in oil and which one you choose will depend on what you are looking to achieve, your expectations and time horizons.

Oil companies have been with us for more than 100 years, and many of them are listed on the world’s stock exchanges.

There are established majors, multinational companies that are household names and at the other end of the spectrum, there are exploration companies. Many of which are relative minnows that are looking for new sources of oil and gas or perhaps to exploit existing fields that larger companies can’t make a profit from. If you are looking for speculative capital growth, they may be for you, but if you are risk-averse then not so much.

Alongside the producers and explorers, there are a whole host of service and support companies to consider. Their share prices are often driven by sentiment around future investment in production and exploration by the oil majors and nation-states and the long term trends in oil prices.

Of course, if you want to take a top-down rather than a bottom-up view of the oil market and focus purely on the big picture items, if so then oil ETFs may well be the way to proceed.

Don’t forget though that portfolio construction is a very personal thing.

We will all have different needs and requirements and attitudes to critical factors such as risk.

It’s usually a good idea to diversify or spread your investments and to seek professional advice before jumping in.

Oil trading hours

Oil markets pretty much trade around the clock from late on Sunday evening to the close of the markets in New York late on Friday. There are trading breaks; for example, the CME takes a 60-minute break in WTI trading each day at 5 pm US time(EST). Many brokers and CFD providers offer round the clock trading in oil as the market is effectively a global one. Brent crude futures trade in London, New York and Singapore for example. As ever it’s always a good idea to check what the timings are with your own broker or service provider.

Oil liquidity & volatility

Oil markets are pretty liquid as a rule and are at their busiest at the points in the day when both European and US markets are open. They can be less liquid in the Asian sessions when traders in London and New York and not active in the markets.

In recent times oil markets have become more volatile, experiencing significant moves in either direction though these moves have been driven more by changes in expectations around supply and demand and less by political tensions, that were once the primary driver of price changes.

Critical economic data out of major economies such as the US and China or changes in trade policies and barriers have replaced middle east tension as the primary influence on oil.

News from the big three producers Saudi Arabia, Russia, the USA  and the OPEC cartel still matters to oil markets but OPEC’s influence has been dramatically reduced since the oil shocks of the 1970s.

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