Introduction to Oil Trading

Trading oil has become more popular in 2020, because COVID-19 has caused unprecedented changes to occur in our lives and businesses.

Oil, among  other popular commodities, has also been  the hardest hit by the pandemic. However, it has remained the best asset for value investors and day traders because of historical moves in the first half of the year. Its price fell below the zero dollar level in April for the first time in history, due to lock-downs and slower demand.

Graph showing trading interest/customer sentiment in Oil over time

In this guide we will be reviewing all the factors and aspects related to oil trading. We will also review the short and long-term trading investment strategies. This guide will also help you choose the right broker for trading oil online. 

Why Is Oil Important?

Oil is the world’s most actively traded and liquid commodity. Changes in oil price can make a big difference in almost every product around the world. It is also among one of the major sources of income for several big countries, including Saudi Arabia, Russia and the United States. It is also one of the key sources of energy for the world. Oil is also known as “black gold” because of its high demand, price volatility, liquidity, and fundamentals.

Value investors enjoy trading on oil prices, because its prices have historically been volatile with the potential to make big moves on market speculations and news events. 

Fortunately, digitalisation has allowed traders to move towards online trading platforms, which has made it quite easy to trade oil and other commodities.

Before delving into oil trading strategies, and discussing technical and fundamental analysis, it’s vital to know why oil trading is popular.

Oil trading has become  an excellent profit-making opportunity for investors over the past few decades, amid its unique characteristics, and being a key focus within the world’s political and economic activities. Also, human dependence on the energy sector has increased sharply in the past few decades, which has added to volatility in prices. In addition to this, the historically solid demand and bright fundamentals ensure strong future trading trends for investors.

Beginner traders generally fail to benefit from oil price movements, due to a  lack of understanding on how to trade oil using leverage and what to look for when speculating on  price movements. 

Furthermore, traders can sometimes be unaware of  how to best invest in oil to take full advantage of its price movements. Some traders  buy stocks of oil production facilities and refineries,  while others look towards CFDs, ETFs, and oil-focused funds. 

In this guide, we will help you learn to trade oil online and which energy-focused financial instruments are best for you.

What Moves Oil Price?

This is a key point to understand, because your profits depend on your price prediction potential. If you know what moves oil prices, you can make big gains from oil price volatility.

Supply and demand are the two main factors behind  price movement. Whether there are wars in oil production areas or the global economy is making changes, investors always take these two factors into consideration. This is because supply and demand will affect the price.

For instance, United States President Donald Trump has recently made headlines for pulling out of a trade agreement with China, which has increased traders’ concerns over economic growth. Oil traders have started speculating about how oil trading prices would be impacted by Trump’s decision. China is among the world’s largest consumers of oil and trade sanctions could make a meaningful change in demand and price.

1. What Are the Key Supply Factors to Watch Out For?

If you’re interested in oil trading and want to learn about how to trade oil, you need to keep an eye on oil supply. Oil supplies were previously solely dependent on how the Organization of the Petroleum Exporting Countries (OPEC) was looking at the market. However, the supply-side fundamentals have changed in the past few years with the entry of several other new players, such as the United States, Canada and Russia.

Bar chart of world oil demand growth vs supply capacity

When any major oil-producing country drops or increases the oil output, it impacts the entire market. Let’s look at the two most recent examples of when we saw huge movements in oil price.

In fiscal year 2014, the Kingdom of Saudi Arabia decided to increase its output to improve its global oil market share. The Kingdom’s move was also aimed at hitting shale production. As a result, the oil supplies surpassed demand and oil prices crashed below the US$30 level. 

What's behind the drop in oil prices? Bloomberg chart of Brent Crude, US$ per barrel
Source: Bloomberg

The excessive supplies have also slashed oil price into a negative territory in April this year. The oil production war between Russia and Europe, along with lock-downs, are among the biggest contributors to this historical oil price crash. Oil prices stabilised in the following months after OPEC and its allies agreed to slash production to help match supplies with demand.

Below are a few supply factors you need to watch out for if you plan on trading oil:

  • Outages or Maintenance: Traders always need to watch out for news related to outages and maintenance, because production halts at key areas and refineries could make a big change in global supplies.   
  • OPEC Meetings and Press Releases: It’s important to know what OPEC is  planning to do, because their moves can make a big change in oil supplies. For instance, OPEC has recently decided to extend its production cuts to drop supplies.
  • US Shale Production: The United States became the world’s largest oil producer earlier this year, thanks to shale oil facilities. However, the oil price collapse has forced energy companies to slash their production plans for fiscal year 2020.
  • Wars: Wars in oil-producing countries could halt oil supplies and support prices. If you’re seeing a threat of war on a major oil country, you can expect a drop in supplies and an increase in prices. The wars in Iraq, Libya and other Arab countries have significantly dropped oil supplies in the past years.

2. What Are the Key Demand Factors to Watch Out For?

Demand is the second key factor that you need to be aware of  when you’re learning about oil trading. Oil demand is determined by how much the world needs oil at a certain time. The oil need, on the other hand, depends on several factors. If the oil demand is outpacing supplies, oil prices will move higher. For instance, oil prices remained under pressure during the first half of the year due to slower demand compared to supplies.

Below are the key factors that could impact the demand side:

  • Oil Consumption: The oil price will go higher if people around the world are consuming more oil. Oil consumption depends on the behaviour of the global economy. The business and economic activity of the largest oil consumers like China, Japan, and India could play a big role in demand.
  • Seasonality: Oil demand usually  jumps during the summer season due to increased business activity and higher oil consumption. The demand also gains momentum during the peak cold season, as people consume more oil products in order to heat their homes.

Before delving into oil trading strategies and where to look for online oil trading, it is important to understand the key terms related to oil trading.

  • What are oil spot prices? Oil spot prices represent the price at which people are buying or selling the price of oil on the spot and taking delivery immediately. In short, spot prices indicate how much oil is worth at present.
  • What are oil future contracts? Crude oil is known for its strong liquidity potential, which allows investors to trade the commodity on a futures contract. Oil futures are contracts in which you agree to pay a price for a specific amount of oil, which will mature on a set date in future.
  • What are oil options? Investors can trade oil options with the aim of speculating on daily price movements to generate profits. The option contract permits investors to use put or call options to speculate on price.
  • What are oil ETFs? It’s an exchange-traded fund (ETF) that invests in oil-related companies. Oil ETF’s can be bought and sold on exchanges like physical stocks.
  • What are oil focused funds? Oil focused funds or hedge funds can  invest a sum of  money in oil-related companies to generate returns for their clients.
  • What are oil CFDs? CFD means the contract for difference (CFD). These contracts enable you to trade on the changing prices of spot, futures, and options.

How to Trade Oil

There are several ways of trading oil markets and you don’t actually need to buy oil in its physical form. Instead, you can trade oil online through reputable brokers that offer you the possibility of trading oil on leverage. You can speculate on the short-term price movements, as well as long-term movements.

1. How to Make Profits From Oil Price Movements in the Short Term

You can speculate on oil price movements for a specific moment. With the use of advanced trading technologies, you can go in and out of the contract in a few minutes. This means that you could make profits in a short amount of time. Now we’ll discuss how to trade oil online and how to make profits on a daily basis. Below are a few different strategies oil traders use to earn profits from day trading:

Swing Trading

If you seek to make money from oil markets in the short-term, you can adopt a swing trading style. In swing trading, the trader attempts to capture short- to medium-term gains over a period of days to several weeks. Swing traders actually make bets on prices when they know major events are occurring or the market is experiencing some changes in fundamentals. Swing traders also use technical analysis to find the trading opportunities.

Trading News

Trading oil on market reports is among the best ways to generate profits from short-term price movements. For instance, if you are reading about or hearing hints of production cuts from OPEC in the news, you can speculate on the price before the announcement of production cuts.      

Trading Oil Through Binary Options

As we mentioned above, binary options are contracts on the prices of oil or other assets. You only will see two possible results for each contract or binary options trade. You will either win or lose.  Once the trade is executed, the results will appear in minutes.  You only need to speculate on whether the price will move up or down, stay within a certain range or move outside of it, or hit a certain price level or fail to do so. The rate of return has always been predefined with the expiry time.

Trading Oil Futures

Trading oil futures would also help you in making money from oil markets in a short time. As mentioned above, it is a contract to buy or sell oil at a predetermined price at a specified time in the future. For instance, an oil futures contract is  trading around US$60 a barrel, but you believe the price will increase before the end of the expiration time. If the oil price soars to US$65 when the contract expires, the trader will make US$5 per barrel in profits.

Trading Oil CFDs

It is among the best ways to generate returns in a short time. CFDs enable you to trade on the changing prices of futures and options, but without buying and selling the contracts themselves. 

2. How to Make Profits From Oil Price Movements in the Long Term?

Some investors like to make profits by speculating on daily or monthly price movements, while others like to trade with a long-term goal in mind. Below are a few of the ways in which long-term investors trade oil:

Investing in Oil Stocks

You can invest in companies that are engaged in oil production, refining or transportation. The stock price movements are mostly correlated to oil price movements, but some companies have better business structures and low break-even points than others. Therefore, it is important to examine the business model of companies before investing money. Long-term investors receive dividends and returns in the form of share price appreciation. 

Investing in Oil ETFs or Hedge Funds

ETF’s and funds can also be traded on exchanges like stocks. You can invest in ETFs or funds and wait for the desired returns. Some hedge funds also offer dividends along with price appreciation. You need to then learn about where these funds or ETFs are investing your money.

What Is the Safest Trading Platform?

An oil broker plays an intermediary role and it’s responsible for arranging the buying and selling of oil contracts. It’s always great to trade oil with an (online) broker who holds a brokerage license. You should double-check the legal status of the broker before making any deposits or payment transactions. The list below shows countries with the corresponding regulatory bodies:

  • United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
  • Australia: Australian Securities and Investment Commission (ASIC)
  • United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
  • Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
  • Switzerland: Swiss Federal Banking Commission (SFBC)
  • Canada:  Investment Information Regulatory Organization of Canada (IIROC)  
  • France: Autorité des Marchés Financiers (AMF)

In addition to obtaining a license and being compliant with regulatory trading standards, the brokers also need to have a strong trading platform that offers key trading tools and features. 

The broker’s cost structure is one of the factors that could significantly impact overall returns. You should be aware of any “hidden” fees, commissions and charges. The order execution timing is also vital, as it’s essential that your broker timely executes your orders.  

Generally, MetaTrader 4 and MetaTrader 5 are considered to be  more advanced trading platforms. cTrader and IG’s trading platforms are also considered to be among the best trading platforms accessible on the market. 

MT4, MT5, cTrader trading platform comparison table

Which Trading Platform Is Best for Beginners?

Beginners always look for a platform that will help them develop their trading strategies. They also like to trade through a user friendly platform interface, which is simple and easy to use. MetaTrader 4 and MetaTrader 5 are considered among the best window-based application platforms for beginners. These platforms offer various types of charts that would aid traders in predicting  price movements. Placing your orders and setting up stop losses are easy with MT4 in comparison to other platforms. The platform also offers an on-site user guide to help traders understand the trading process. The low, minimum deposit requirement and demo account access are among the best features MetaTrader offers to beginners.

How to Trade Oil: Tips and Recommendations

Oil trading is among the best ways to generate big returns, both in the short and long term. Oil trades 24 hours a day, which enhances an investor’s opportunity of capitalising on price movements. It’s suggested for traders  to use both technical and fundamental analysis before investing money. It is also recommended that traders use trusted platforms for trading oil.

Frequently Asked Questions

Is Oil Traded 24 Hours a Day?

Yes, oil trades 24 hours a day and five days a week. Oil trading times also depend on which broker and trading strategy you are using. If you are a day trader, you can trade oil several times a day. However, long-term investors invest their money and wait for months or years to achieve their desired results. 

What Is the Safest Trading Platform?

Trading oil with registered and popular online brokers has always been deemed the safest way. MT4, MT5 cTrader and Proprietary Web Platforms, such as IG, are considered a few of the safest for trading oil online. We recommend easyMarkets (sign up here) and AvaTrade (sign up here) for trading oil.

Is It Necessary to Consider Supply and Demand for Oil Trading?

Yes, it’s critical to consider supply and demand when you’re planning to invest in oil trading. However, if you’re a day trader, market reports, events and technical analysis play a key role in price prediction.