Oil trading: understanding how it works

Interested in oil trading but not sure how it works? Worry no more and read this article which explains how it works.

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Oil trading involves buying and selling different assets based on one of the most widely used commodities in the world. Additionally, oil trading is done on oil CFDs, including cash and futures. This means that you are not buying a particular asset, but speculating on the rise or fall of the price of oil in the open market.

How Oil Trading Works

Oil is a finite resource; its price can therefore experience massive fluctuations due to variations in supply and demand. This volatility aspect makes it extremely popular among traders. There are three different ways to trade oil;

  • Trading with spot oil prices represents the cost of buying and selling oil immediately or, in simpler terms, “on the spot”. This means you don’t have to set a date in the future. Spot prices indicate the current value of oil.
  • Oil futures are contracts where you agree to exchange a quantity of oil at a specific cost on a specific date. They are traded on exchanges and reflect the demand for different types of oil. Oil futures are a standard method of buying and selling oil and help you deal with rising and falling prices. Companies use futures markets to obtain a favorable oil price and hedge against adverse price fluctuations. However, they are also popular among speculative traders, as there is no need to take delivery of the barrels, although you have to fulfill the contract through cash settlement.
  • Trading via oil options is similar to that of a futures contract, but there is no obligation to switch if you do not wish. You get the right to buy or sell a quantity of oil at a set price and on a specific expiration date. However, you are not obligated to exercise your option. There are two types of oil options: call options and put options. You can buy via a call option if you think the price of oil will rise, and if you wish, you can buy via a put option. You can also sell call options and buy put options if you want to take opposing positions. Selling options generates income in quiet markets since you receive their value outside of your trade.

One can also trade oil with brokers on the trading platforms. The broker must be knowledgeable and the forum must be reliable. Most brokerages operate as oil trading platforms, such as Oil Profit

What moves the price of oil?

The relationship between supply and demand is what necessarily moves the price of oil. When there is a need for oil that outweighs its collection, the price increases. Conversely, if the market goes down and supply goes up, the price of oil will go down. Factors like oil storage, the push towards alternative energy sources, the performance of the global economy and the influence of OPEC affect oil supply and demand.

Types of Crude Oil

There are several types of crude oil, but the most common are:

  • Brent crude oil is a widely popular marker and is among the important benchmarks for oil in the Middle East, Europe and Africa. It is estimated that 60% of the price of oil traded in the world is fixed on the basis of Brent.
  • WTI is the main type of crude oil consumed in the United States and it comes from wells located in America. The oil fields of the United States are landlocked; transporting WTI is therefore quite expensive compared to Brent.

We have seen how oil trading works, but what you need to know is that oil futures contracts are not measured in barrels but rather in thousands of barrels.

Warning: This article is promotional content and does not constitute investment advice. Do your own research and only invest the money you can afford to lose.

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