Oil is still the world's most important energy asset.

How to Trade Oil? –Online Oil Trading Guide

Oil is still the world's most important energy asset. Historically speaking, the price of Brent trades in a wide range between 30 USD per barrel and 150 USD per barrel.

Which Financial Instruments can be used for Oil Trading?

Oil Price Fluctuations can be traded mainly via the use of four different financial instruments:

(i) Crude Oil Futures

(ii) Crude Oil Standard Options

(iii) CFD Oil Contracts

(iv) Binary Options Oil Contracts

The price of oil is determined by the market on a 24/5 basis. The easiest way to trade oil is via the use CFDs, but let’s start by presenting some basic information for oil traders.

 

Who is Trading Oil?

Oil is traded mainly by three parties: oil consumers, oil producers, and speculators. Oil consumers and producers open positions in the futures market in order to manage and to reduce their market risk. Market risk is the risk that derives from the general market price fluctuations. Therefore, trading oil for producers and consumers can serve the role of hedging against excessive market risk.

Speculators Trading Oil Price Fluctuations

Oil is also traded by common speculators who are opening short and long positions in order to profit from forecasted short-term oil price fluctuations.

■ At times when speculators believe that crude oil prices will go up, they buy Crude Oil Futures or CFDs or Options (Going Long)

■ At times when speculators believe that crude oil prices will go down, they sell Crude Oil Futures or CFDs or Options (Going Short)

 

How the Oil Price is Formed

The price of oil is formed in three ways:

a. The OPEC Basket Price

The OPEC Basket price is a mix of the prices of OPEC oil producers (Saudi Arabia, Venezuela, Mexico, Dubai, Nigeria, and Algeria).

b. NYMEX Futures Price

The NYMEX oil price is the most important method of pricing oil. The price of oil is based on a Futures contract. Actually, a NYMEX oil future represents the current value of a barrel that it shall be produced and purchased in the future.

c. IRAC (Imported Refiner Acquisition Cost)

This is a US oil pricing method. The IRAC price is based upon the total volume of oil imports in the US.

 

Two Major Oil Types

In total, there are more than 160 types of oil, these are the two main types:

(1) Brent

Brent is used for gasoline production and other applications and it is formed by combining 15 different types of oil. Brent oil is priced with the premium of 4-5 USD per barrel compared to the price of OPEC Basket.

(2) WTI (West Texas Intermediate)

West Texas Intermediate is mainly used for producing gasoline and it is priced at a market premium of about 1-2 USD per barrel compared with Brent. That means 5-7 USD price premium compared to the price of OPEC Basket.

 

 

 

Oil Production and Largest Oil Reserves

The largest reserves of oil are held by Saudi Arabia (267 billion barrels) and by Venezuela (211 billion barrels). Canada is holding 174 billion barrels, Iran 151 billion barrels, Iraq 143 billion barrels and Kuwait 104 billion barrels. Other important oil reserves are held by the United Arab Emirates 98 billion barrels, Russia 60 billion barrels, Libya 47 billion barrels, Nigeria 37 billion barrels, Kazakhstan 30 billion barrels, United States 27 billion barrels, Qatar 25 billion barrels, China 20 billion barrels, Brazil 14 billion barrels and Algeria 12 billion barrels.

Graph: Major Oil and Natural Gas Pipelines in Europe

Major Oil and Natural Gas Pipelines in Europe

What 1 Barrel of Oil Produces?

One barrel of crude oil counts 42 gallons. After a barrel of oil is refined, it produces 20 gallons of gasoline fuel and 7 gallons of diesel fuel. In addition, it produces 17 gallons of other petroleum products (plastic, propane, and ammonia).

Chart: Cost of Producing Oil

Cost of Producing Oil

Table: Largest Oil Producing Countries and Largest Oil-Reserves

Country

Barrels Per Day

Proven Oil Reserves

Saudi Arabia

11,730,000

267 Billion Barrels

United States

11,110,000

36 Billion Barrels

Russia

10,440,000

60 Billion Barrels

China

4,197,000

19 Billion Barrels

Canada

3,856,000

174 Billion Barrels

Iran

3,594,000

151 Billion Barrels

United Arab Emirates

3,213,000

60 Billion Barrels

Iraq

2,979,000

143 Billion Barrels

Mexico

2,936,000

11 Billion Barrels

Kuwait

2,797,000

104 Billion Barrels

Venezuela

2,529,000

211 Billion Barrels

Table:  Countries with the Largest Oil-Imports

Country

Barrels Per Day

United States

9,213,000

China

5,664,000

Japan

3,472,000

India

3,272,000

Korea, South

2,590,000

Germany

1,876,000

Italy

1,591,000

France

1,298,000

Netherlands

1,202,000

Singapore

1,137,000

 

Crude Oil Markets and Futures

Crude Oil futures are standardized contracts. As in the case of every other futures contract, the buyer agrees to take delivery a specific quantity of crude oil from the seller at a predetermined price and a predetermined future date.

Crude oil futures can be traded mainly in NYMEX (New York Mercantile Exchange) and TOCOM (Tokyo Commodity Exchange). There are other markets as well as the Intercontinental Exchange (ICE), India's National Commodity and Derivatives Exchange (NCDEX), Dubai Mercantile Exchange (DME) and Multi Commodity Exchange (MCX).

(1) NYMEX Light Sweet Crude Oil Futures

NYMEX Light Sweet Crude Oil Futures are traded in lot sizes of 1,000 barrels. Prices are quoted in dollars.

■ 1 Barrel of Oil = 42 gallons

(2) NYMEX Brent Crude Oil Futures

NYMEX Brent Crude Oil Futures are traded in lot sizes of 1,000 barrels. Prices are quoted in dollars.

■ 1 Barrel of Oil = 42 gallons

(3) TOCOM Crude Oil Futures

TOCOM Crude Oil Futures are traded in lot sizes of 50 kiloliters and quoted in yen.

■ 1 kiloliter of Oil = 264.2 gallons

 

Factors Influencing Oil's Price

The price of Oil is influenced by several macroeconomic and other factors:

(1) Demand for Oil

The demand for oil is determined by the general economic conditions in large oil consuming countries, and especially in the US.

(2) Oil Supply

The global oil supply is controlled by a few countries which are switching their production levels according to expected demand.

(3) The Exchange Rate of USD

Crude Oil is priced in US Dollars for more than 50 years. When the US Dollar moves up against the Euro and other important currencies then the price of Crude Oil tends to fall and vice versa.

(4) Political Crisis and War in Oil-Producing Crisis

Political Crisis and War are (unfortunately) common practices in the Middle East where our global oil resources are produced. At times when important events occur (such was the war in Iraq), the price of oil surges.

(5) Weather Forecasts

Important weather updates can influence the oil market. For example, a warning for a very heavy weather in the US can drive the price of Oil and Natural Gas violently upwards.

(6) Global warming and Alternative Energy Sources

Oil is held responsible for the Global Warming phenomenon and that leads to the research and the exploitation of alternative energy resources such is the Renewable Energy. Keep in mind that the cost of abandoning the current oil-based economy is huge and may even reach 40 trillion dollars. Consequently the transformation of our global economy in a greener economy it will need a lot of decades.

 

Tips when Trading Crude Oil

Here are some simple tips for Crude oil traders:

(1) Oil is a very active market and it can be influenced by tens of different events on a daily basis. If you want to trade oil you would better read the news very carefully.

(2) When there is an important update that influences the oil market, follow the trend aggressively. Usually, the price of oil moves in a strong bullish or bearish formation.

(3) The Crude oil market tends to range after a big move. You can trade these ranges until there is a clear breakout.

(4) Never trade oil without a stop-loss. Crude oil is a volatile market and a major event can lead to strong swings. Place always a stop-loss in every trade, a stop-loss can work as your trading shield against this volatile market. Don’t trade naked especially, as concerns overnight.

(5) Crude Oil is priced in US Dollars. That means that high fluctuations of the US Dollar in the Forex Market can put pressure on oil prices.

(6) Crude Oil prices in the long-term tend to move in the opposite direction than the stock markets.

(7) When the price of Crude moves far above $100 it can lead to great concerns regarding the Global Economy and Global growth. An expensive oil price can cause many troubles to many people. Even OPEC knows that an expensive oil price can lead faster to the wide use of competitive energy resources.

(8) When there is no news ahead, the price of oil moves and reacts according to major technical analysis levels (mainly reacts to pivots, support & resistance).

 

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How can common Investors Trade Oil?

As it is already mentioned there are many ways to trade the oil price fluctuations. The easiest way for common investors is via the use of CFD and Futures contracts.

 

CFD Brokers and Oil Trading

Here is a comparison table between CFD brokers and general information about their Trading Terms.

CFD BROKER COMPANY INFO TRADING OIL INFO RATING(*)
VISIT BROKERS

XM

 
Founded in: 2008
Supervised by: CySEC, MiFID
US Residents: No
Trading Spread: 5.0 pip
Trading Leverage: 1:400
Trading Bonus 30-50%
Min. Deposit: $10
 
Energy Assets:
Crude Oil
Crude Light
Natural Gas
Rating:
84.26%
 
VISIT BROKER

HOTFOREX


Founded in: 2007
Supervised by: CySEC, MiFID
US Residents: No

Trading Oil Spread: 5.0 pips
Trading Leverage: 1:400
Trading Bonus 50%
Min. Deposit: $10
 
Energy Assets:
USoil
UKoil
Rating:
77.78%
 

 
(*) Broker Ratings According to FxPros.net Forex Rating Formula v4.0
 

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Global Consumption of Energy Resources

The chart below presents the global market energy consumption (source BP 2014 Energy Report)

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