Global Markets

Trading Soft Commodity Assets

The term commodity refers to commercial items delivered by different producers that share uniform quality and a common value.

The history of commodity trading starts 6.500 years ago, during the early Sumerian civilization. Nowadays, there are tens of commodity exchanges worldwide offering the chance to individual investors to profit from commodity price fluctuations. There are six main categories of commodities:

(1) Precious Metals (gold, silver, platinum etc.)

(2) Industrial Metals (copper, aluminum etc.)

(3) Energy Assets (crude oil, natural gas, etc.)

(4) Agricultural Commodities (corn, coffee, soybeans, sugar etc.)

(5) Livestock (hogs, cattle, and feeder cattle)

(6) Other Commodities (rubber etc)

Full information about the categories of commodities and their assets are found below in this article.

 

Financial Instruments for Trading Commodities

There is a great number of financial instruments used for commodity trading:

(1) Standard Futures and Options

(2) Exchange Traded Commodities or ETCs (Commodities traded in organized exchange markets are called Exchange Traded Commodities)

(3) Forward Contracts and SWAPS

(4) Contract for Differences (CFDs)

(5) Exotic Options and Binary Options

(6) Commodity ETFs

(7) Trading Commodity Stocks

Read more: Trading Soft Commodities

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 of 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, an 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 a 5-7 USD price premium compared to the price of OPEC Basket.

Read more: Oil Trading Guide (USOIL)