Oil CFDs: How It Works And How To Trade

Oil is one of the most traded raw materials in the world. However, it is essential to keep in mind that crude oil markets are usually quite volatile, which is one of the main reasons why most people are attracted to this particular commodity.

For instance, in times of economic or geographic instability, oil prices often fluctuate, hence creating trading opportunities for seasoned traders.

Crude oil CFDs are quite popular when it comes to speculating on oil prices. CFDs (Contract for Differences) are derivatives that allow traders to speculate on movements of underlying assets, without buying crude oil on its spot price. 

With oil CFD trading, traders agree to exchange differences in value between opening and closing positions. The high volatility of today’s oil market means that traders can either make profits or losses. ^[1] 

Oil CFDs require traders to trade with leverage. Therefore, you are only required to place a fraction of the total value to open a position. This gives traders better exposure to the crude oil market and can amplify profits or losses. However, this also exposes them to a higher risk to losses making it essential for them to adopt effective risk management strategies when trading.

Key Points

• Oil CFDs (Contracts for Difference) are financial derivatives that enable investors to speculate on the price movements of crude oil without owning the physical commodity.
• Oil CFDs work by mirroring the price fluctuations of the underlying crude oil market, allowing traders to make a return from the difference between the opening and closing prices without having to take physical possession of the oil.
• Oil CFDs offer various advantages, such as the ability to go long or short and the flexibility to trade on margin.

CFDs in the Oil Industry

Oil trading is a category of the commodities industry which produces a wide variety of international commodities, such as Crude Oil WTI and Crude Oil Brent, as well as local commodities, such as heating oil and natural gas for homes.

Oil prices typically fluctuate depending on the current demand and supply, as well as their origin. Oil trading prices, on the other hand, vary during periods of volatility. There are two commonly traded crude oil benchmarks – WTI (West Texas Intermediate) and Brent, both of which can be accessed on various trading platforms.

However, there are various differences between Brent and WTI crude oil that traders should consider when choosing their preferred trading commodity. 

For instance, Brent crude oil is typically sourced from areas in the North Sea and enjoys more international prevalence, whereas WTI oil is sourced from oil fields in Louisiana and Texas. WTI crude oil is seen as a sweeter and lighter alternative with a low sulfur content.

However, Brent is sourced closer to the sea hence reducing transport costs compared with WTI crude oil which is sourced inland. These factors can impact the price of both Brent and WTI CFDs especially when it comes to selling and buying raw commodities.

Brent Vs WTI Oil Prices

In the recent past, Brent crude oil has been more susceptible to political, geographical and economic instabilities and pressures. Since Brent crude oil is generally more accessible to a wide range of traders across the globe, its prices tend to fluctuate in times of crisis and Brent oil prices often surge. 

On the other hand, WTI crude oil is less commonly available and is not affected by most international events. As a result, WTI oil prices tend to maintain lower prices throughout the year. It is vital for oil CFD traders to understand these external factors because they form part of the fundamental analysis of oil markets.

Some people enjoy the excitement that comes with trading in such volatile markets. Trading on margin, otherwise known as leveraged trading, allows you full exposure to various financial assets. However, leverage trading in volatile markets also amplifies the risk of significant loss.

Guide to trading oil CFDs

Choose the oil commodity you want to trade – WTI, Brent or both

Open an oil CFD account and deposit funds. As touched upon above, it is essential to adopt effective risk management strategies when trading with leverage. For instance, you can mitigate losses by using stop loss orders which close positions once your trades reach your bottom limit.

Stay updated with the latest analysis and news

For instance, traders can follow crude oil market analysts who provide breakdowns of global news and can also predict possible political or economic trends as well as their impact on global oil markets. This can potentially be considered by traders  as oil CFDs are highly volatile.

Create a trading plan

There are numerous short-term and long-term strategies that you can use when trading oil CFDs. Choose one that suits your goals and preferences.

If you want to trade various energy commodities including heating oil and natural gas, you can opt for commodity baskets. This allows you to trade oil CFDs on a wide range of commodities in just one trade and potentially helps spread the overall risk of leveraged trading.

Factors Affecting Oil Prices

Crude oil prices are determined by three main factors:

• Supply – Typically includes oil resources that can be extracted from sea or land, as well as oil resources that mainly consist of daily, weekly, or even monthly amounts of crude oil barrels produced at a financially beneficial price.
• Demand – Dependence on oil supplies for maintaining growth in the economy, and the use of alternative energy sources such as solar, hydro-electric and wind energy.
• Relations between players in global oil markets – These relations usually include production agreements between major oil producers concerning how much each player should produce. On the other hand, economic or political sanctions lifted from or imposed on oil-producing countries such as Qatar, Iran, Russia, or Venezuela can cause fluctuations in oil prices as well as prices of other related commodities. For instance, a decision by OPEC+ to reduce supply causes a spike in oil prices.^[2]

Trading oil CFD futures

Traders can also use contracts for difference to speculate on movements in price in the oil market using commodity futures contracts. Oil CFD futures are contractual agreements that allow traders to sell and buy assets at a particular price in the future. Oil CFD futures are typically traded on local exchanges. 

Although selling and buying oil futures is not carried out through CFDs, they give investors an opportunity to trade price changes of future contracts.

WTI future prices are usually lower than those of Brent. These prices are usually determined by the commodities’ spot prices.

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References