Crude oil is one of the most popular trading commodities globally. It’s a naturally occurring fossil fuel, that’s refined to create petrol and diesel. This is used to keep our vehicles running and to manufacture many of the items that we use on a daily basis, like plastics and cosmetics. Though advancements in renewable energy have been made in the last decade in an attempt to lessen our reliance upon fossil fuels, they still account for 84% of the world’s energy usage. Oil represents the largest share of this usage, making up 33%.
The oil trading market is renowned for the risks that it presents to traders. Volatility has risen sharply in recent years in the energy sector, and with it comes the risk of losses, but also the potential to make handsome profits. This emphasizes the need for potential traders to familiarise themselves with the market and conduct significant research before investing.
Using tools available online, the commodity market trends can be understood and manipulated in order to maximize the potential for profit. Investors can also use contracts for different (CFD) brokers, like the Plus500 oil trading platform, to speculate on the price movement of the commodity.
Read on for some tips and strategies that could help you on your oil trading venture.
Understand The Primary Types Of Crude Oil
There are hundreds of different types of oil on the market. Oils differ based upon the attributes that characterize them and also the geographical location of the oil field from which they are derived. The most important primary forms of crude oil, which act as benchmarks for global oil prices, are Brent and West Texas Intermediate.
Brent Crude Oil is characterized by its light, sweet nature; being light because of its low density and sweet because it contains little sulfur. It’s derived from a selection of oil fields in the North Sea and is used to set the prices of two-thirds of internationally traded crude oil supplies globally.
West Texas Intermediate is primarily sourced from Texas, North Dakota, and Louisiana. It is also a light and sweet oil, which is attractive as it eases the refining process and is cheaper to produce than heavy, sour oil variants.
Get To Grips With Oil Price Movements And What Affects Them
Like most commodities, supply and demand have a fundamental impact on the oil market. This means that if demanded increases or supply decreases, prices could go up and if demand decreases or supply increases, the price could go down. The key feature that complicates this process is the futures market.
Oil prices are predetermined in this market and require a futures contract, which makes it possible to buy oil by the barrel at a fixed rate on a specific date in the future. This agreement is signed by both parties partaking in a transaction and both must fulfill their obligations on the date agreed.
There are two types of futures traders, these are Speculators and Hedgers. Speculators are traders who analyze the market to attempt to predict futures price movements. Hedgers are those who actively buy and sell commodities, and use the futures market to protect themselves from possible price movements.
Another factor that affects oil prices is sentiment. This is the projection of fear or belief on the market, anticipating that oil demand may increase or fall in the future, and altering your actions in the present to accommodate for this. This can dramatically increase oil prices by causing speculators and hedgers to act accordingly and purchase futures contracts.
The U.S dollar can also have a notable influence on oil prices. If the dollar is high then this can put oil prices under pressure, alternatively, a lower dollar could improve prices. It’s, therefore, a good idea to keep an eye, not only on key market analysis for oil but also on the foreign exchange market, specifically the dollar.
Construct A Trading Strategy
Once you’ve done your market research, and understand the asset itself, as well as the movement of the market and future trends that could surface, you can begin to develop a trading strategy.
Probably the most popular trading strategy is the Buy and Hold. This is the process of analyzing supply and demand factors in order to make a calculated prediction, and act based upon their findings. If what they predict comes to light then investors will close their position in order to claim profits before expiry.
Alternatively, you could consider a Technical Analysis Trading Strategy. This consists of basing an investment decision upon technical indicators that could help to predict crude oil’s price movement in the future. This can help traders to make informed decisions on the right time to buy and sell. Tools like the Relative Strength Index can be useful as they analyze market sentiment, and oversold or overbought positions.
Given that the world is still reliant upon oil as an energy source, it’s unlikely to be going anywhere any time soon, despite efforts to convert to renewable fuel. If you’re considering investing, ensure that you’ve done your research, have a clear strategy in mind and you could well profit from your investment.
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