CFD TRADING ON WTI CRUDE OIL - HOW TO AND GUIDE
Oil is a highly volatile asset, and this high volatility creates many trading opportunities for traders. At the same time, you can use it to hedge investment in other assets, diversify portfolio, and take a stake on geopolitical issues. The best part about trading oil is that it is very accessible, and available for 24 hours a day and 5 days a week; all of everything is available online. To get into trading crude oil, you need to know the reason of oil price movements, impactful factors for oil prices, and the methods and strategies for trading oil charts. Let’s start.
What are Brent Crude and WTI oil?
Crude oil refers to fossil fuel and unrefined petroleum. It contains hydrocarbon deposits and several organic materials. By refining it, usable products like gasoline, petrochemicals such as plastics, diesel, fertilisers, and medicines can be produced. Oil is a basic and crucial component in the global economy. According to the International Energy Agency (IEA), the total consumption of oil in the world is nearly 93 million barrels per day. The commodity not only plays a major role in our daily lives but is also closely followed by businesses, economists, and obviously, traders. Crude oil is one of the most traded commodities globally. It is used as a tool for investment, hedging, speculation, diversification, and more.
Two of the most popular benchmarks for trading oil on MetaTrader 4 and MetaTrader 5 are Brent Crude and WTI.
- Bent Crude: Bent Crude oil is North Sea Brent Crude. It is the second popular benchmark when it comes to trading oil. It serves as a scale for the price of oil. Bent Crude oil is mostly extracted from the North Sea. It is refined in the Northwest Europe. Brent is a primary oil type in North Africa and Europe.
- WTI: The full form of WTI is West Texas Intermediate. WTI is a high-quality crude oil that is also known as US Crude. The oil is exported and used all over across the world. This light and sweet crude oil is refined in the United States. It usually costs $1 to $2 higher than Brent Crude oil. Like Brent Crude, it also serves as an oil benchmark. Its price is used as a reference for sellers and buyers of crude oil, and the media also quotes it as the price of oil.
What Is the OPEC Basket?
Apart from Brent Crude oil and WTI, OPEC oil is another important factor in the global market. OPEC stands for Organisation of Petroleum Exporting Countries. OPEC oil is a combination of seven types of crude oil, from Saudi Arabia, Dubai, Mexican Isthmus, Venezuela, Algeria, and Nigeria. It is less sweet and darker than both Brent and WTI. Although OPEC oil is usually cheaper, yet it is important in the global market.
What Affects the Price of Oil?
- Oil Supply & Demand: Oil is one of those resources that are not located in all countries. Therefore, the production of oil is strenuous. About a hundred countries produce oil, which is about half of the world. Five of these countries produce 49.6% of the world’s total crude oil production. It gives these countries and oil associations more control over their supply and impact price. They can increase the oil production to make a profit when they think price is good. At the same time, they can also decrease their production to prevent prices from falling or to increase them. Demand for oil grows when the global economy performs well since consumers buy more products, factories produce and transport more goods, companies invest more, and consumers travel more for both business purpose and leisure. On the contrary, a weakening global economy leaves the opposite effect, and demand for oil decreases.
- Geopolitics Effect on Oil: Only five countries produce about half the crude oil in the world. So, tension in one of these countries can cause crucial issues with supply. For example, a war or conflict in an oil-producing region may pose a threat to inventories, as well as production and refinement facilities, and it can cause a spike in the price of oil.
- Dollar Strength: The value of the US dollar has a direct impact on the price of crude oil. If the value of dollar drops, both WTI and Brent Crude oil rise in value. Similarly, when the value of dollar rises, the price of crude oil drops. However, it does not necessarily reflect minor or daily fluctuations in the value of dollar. Only significant changes in the dollar strength results in corresponding changes in the price of oil.
Benefits of Trading Crude Oil
Since crude oil is one of the most popular assets in the world for trading and investment, there are many benefits of trading crude oil, such as –
Volatility: Oil prices have high volatility. The large price movements are one of the most important advantages of trading Brent Crude and WTI oil. The price of crude oil moves up and down with considerable swings. Look at the chart below to see the price movement. This price movement offers the potential of capitalising on the movements through swing trading, intra-week trading, and intra-day trading.
Diversification: Having all eggs in one basket is struggling for a lot of traders and investors. People’s wealth is tied up in property in many Western countries such as the UK, the US, and Australia. On the contrary, assets such as shares account for a large portion of personal wealth in other countries. It is dangerous because if a single market falls, the entire portfolio of an investor is at risk to be wiped out. You can reduce this risk by trading a range of markets and thus, diversifying your portfolio. Investing in commodities like crude oil through trading is a great way for diversifying your portfolio and managing your risks.
Trading fundamentals: New traders find many markets intimidating because they depend on technical signals. However, crude oil is influenced by fundamental events heavily, like, as mentioned earlier, geopolitical tensions. It means that you can find interesting trading opportunities if you follow the news regularly.
How to Trade in Crude Oil
Oil is a very interesting market and there are many ways you can trade and invest in it. People usually assume that purchasing a barrel of oil and selling it a higher price when the price increases is the simplest and most straightforward way to invest in crude oil. However, the reality is far from assumption. It is actually very difficult for an investor or a retail trader. Unlike some other commodities such as gold and silver, it is difficult to store oil. Moreover, it is highly toxic and needs significant insurance. So, you may go for these practical methods of investing and trading oil –
Investing in oil stocks
A great way of investing in oil and earning profits when the price goes up is to invest in the stocks of companies that are involved in exploring, producing, and refining oil. These companies include global behemoths like Royal Dutch Shell, Total SA, BP, and Exxon Mobil. However, this approach is a bit challenging because you are not investing in oil directly but in the shares. Now, the share prices may not always reflect changes in the oil price. It happens because there are many other factors that play a role in valuing a company beyond the price of the product. These factors include management changes, regulation, and dividends that may impact a business.
Investing in oil ETFs
Another great option for trading oil is investing in commodity ETFs or oil ETFs. ETF stands for exchange-traded funds. It is an asset that is a bundle of other assets like stocks that can be chosen by an investor to trade or invest in. Its main benefit is that the investor is provided with the opportunity of investing in or trading a larger market, instead of having to pick individual instruments. For example, if you want to invest in US tech stocks but do not want to add individual stocks to their portfolio, then you can search for an ETF representing the US tech stock market.
There is a wide range of commodity ETFs you can choose from to trade, including crude oil ETFs. Oil companies’ stocks and crude oil futures can be included to them. Like investing in other instruments like shares, the traditional way of investing in an ETF is to invest at one price and then close it when the price of the ETF increases. Thus, you can make a profit on that difference. However, you can also trade ETFs via a derivative called a CFD that allows a trader to trade in both directions. So, traders can earn profit whether the market rises or falls.
Trading oil CFDs
CFD stands for Contract for Difference. It is a tool that allows traders to trade price changes in crude oil but they do not need to invest in the physical assets or handle physical contracts. Instead, you can start trading by signing up for an account with a CFD broker. After that, you need to download and install the trading platform provided by the broker. A demo account can be used with virtual money for demo trading but you have to deposit funds into your live accounts. Now, you are all set to open and close trades on the trading platform.
Trading oil futures
Trading oil futures is a common option whether you are trading Brent Crude oil or WTI oil. A futures contract is a legal agreement to purchase or sell an asset at a predetermined value at a certain time in the future. A trader does not have much interest to receive the asset itself. They are only trading the contract to earn a profit.
For instance, assume that a futures contract for oil trades at $55 a barrel. Now, if a trader thinks that the oil price would rise before the contract expires, they could buy the contract with the expectation that the contract can be closed at a profit. If their prediction is right and the, and the oil price increases, to $58 for example, when it expires or the trader closes it, they will make a profit of $3 per barrel. So, for 1,000 barrels of oil, the trader would make a profit of $3,000 in total. However, if their prediction goes wrong and the price falls to $54, then they would lose $1,000.
How to Trade Crude Oil in IQ Option
IQ Option can help you get started if you want to trade crude oil. To start trading, you have to open a trading account on IQ Option first. It is very easy to do; you only need to click on the ‘Sign up’ button at the top of the homepage. The new account can be registered by filling in a simple online registration form or via existing accounts on Google or Facebook. If you are a beginner, it is a good idea to start with a demo account. On the demo account, you can learn the basics of trading crude oil and test your trading strategies in a risk-free environment without spending real money. There are two ways to trade crude oil on IQ Option, such as
- Futures: You can buy oil futures at IQ Option. These are highly volatile and risky, but they offer great returns. However, you must trade oil futures only after you have researched and studied about it thoroughly. Also, keep in mind that trading oil futures without capital is not worth it.
- ETFs: You can trade ETFs on IQ Option just like you trade stocks of major companies. For example. For example, if you purchase a share of US oil Fund (USO), then you would be trading a barrel of oil. Take note that by trading ETFs related to the energy sector and mutual funds related to the energy sector, you get exposure to crude oil indirectly. ETFs and mutual funds based on the energy sector invest on oil stocks and oil companies exclusively and the risks of trading these ETFs are very low.
Trading CFDs v/s Futures
Futures and CFDs are two of the most common ways to trade crude oil. So, it is common for traders to compare both instruments to see which is the most suitable for them. Here are the main differences of the two assets
|CFD Trading||Futures Trading|
|Usually, no expiry dates||There are expiry dates (Monthly or quarterly)|
|Trade via a counterparty (Your broker)||Trade via an exchange (NYMEX), CBOT, CME)|
|No ownership of product||No ownership of product|
|Can trade long and short||Can trade long and short|
|Tradable on leverage||Tradable on leverage|
|Can trade more than 3,000 markets||Less markets available than CFDs|
Strategies for Trading Oil
Once you find a broker that will allow you to trade oil online, you must think from a strategic perspective about how to do it. It is vital to implement risk management in trading properly, but you also must apply specific oil trading strategies. You can split most trading methods into different trading styles and timeframes.
- Technical analysis: You need to analyse price charts via bars or candlesticks and indicators in order to locate trade setups offering higher probability and a positive expected equity curve in the long-term.
- Fundamental analysis: It is important to read and analyse before using data, statements, and news to make assessments about supply and demand in future.
- Wave analysis: Lastly, you have to analyse price patterns on the chart. By doing this, you can not only understand the context but also the market structure and you can also identify trading opportunities, if there are any.
- Very low charts like 1 to 5 minutes charts are used by scalpers.
- Low timeframes like 15 to 60 minutes charts are used by intra-day traders.
- Mid-low charts like 1 hour to 4 hours charts are used by intra-week traders.
- Middle timeframes like 4 hours and daily charts are used by swing traders.
- Higher timeframes like weekly or monthly charts are used by long-term traders.
Best Places for Trading Oil
IQ Option is one of the best brokers to trade oil. The broker offers top-notch instruments and analysis tools to offer an easy trading experience to its clients. You can start trading with $10 minimum deposit only in your account. There are more than 10 payment methods to deposit money into your trading account. IQ Option offers $10,000 virtual money in its demo account where you can practise crude oil trading without risking real money. So, it is the best place where you can start trading.
It is possible to profit from crude oil trading, but you need to develop the skills first that are required for it. Learning about it includes finding out about the factors that impact the markets, price histories, and government policies that impact the price of oil. If you are a novice trader, you may visit the website of IQ Option and go through its blog and free educational material.
WTI crude oil starts trading on Sunday, at 6:00 pm.
Also known as ‘near’ or ‘spot’ month, front month refers to the nearest expiration date of a future contract. Front month crude oil is one of the most heavily traded and most liquid future contracts.
The best time to trade crude oil is the time when the market sees high liquidity.
Instead of buying oil, you can invest in oil with little money by trading oil futures, oil CFDs, oil ETFs, and investing in oil shares.
Since crude oil is a highly volatile asset, it is very profitable to trade it. However, you need to develop trading skills and learn about crude oil thoroughly to earn profits from trading.