A Novice For Oil: A Guide On Getting Started With Oil Trading

guide on oil trading
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The major US benchmark for crude oil has fallen in 2021 into a market where its prices are now falling. The general crude oil prices are still sitting comfortably on top of the lowest point. Brent crude, which is the North Sea’s benchmark and is commonly used for an international measure, is still hovering over the bear market territory.

In this article, we’ll provide you with all you need to know about crude oil trading, including what spot prices and futures contracts are, especially with what moves the oil’s market value and how you can trade.

The What And Why of Oil Trading

To get the general gist of oil trading, it’s a process where a consumer buys oil in the market and then sells it to make a profit, regardless of whether it’s speculating on the market price or exchanging the physical commodity. Furthermore, the oil market, similar to other forms of investment and trading, is famous because of how volatile its market value is, and it’s caused by sudden changes in the asset’s supply and demand.

Out of all the different investment assets, the question remains as to why choose oil in the trading market. Firstly, oil is the world’s primary economic source of energy. It also can be processed to become various products such as diesel, wax, lubricants, gasoline, petrochemicals, and more. With that in mind, oil becomes an asset in the market with high demand as it’s traded in large volumes, not to mention its high liquidity.

A Selection of Oil Markets to Trade

Before anything else, you must know that there are hundreds of variations of oil in the market, in which all of them are traded all over the world in high demand because it’s an essential source of energy. So if you ever see in social media posts, news, or trading platforms about oil markets, they’re typically referring to the benchmarks of oils, in which those are certain types of oils that are then used to compare the price of the other.

Regarding the benchmarks for oil, there are two that are mainly used in the market, and those are the WTI (West Texas Intermediary) and Brent Crude.

However, WTI is what the market commonly uses for benchmarking oil prices as it’s used worldwide to measure the supply and demand of the asset. The West Texas Intermediary is produced in North America. Typically, its features are traded on NYMEX or the New York Mercantile Exchange, a division of the Chicago Mercantile Exchange.

The other benchmark for oil is Brent Crude, a blend of light and sweet crude oil that’s initially extracted from the Brent oil field. Also,  it’s a popularly used benchmark as it features trades on the Intercontinental Exchange, and it’s the leading benchmark for oil prices across Middle Eastern, African, and European markets, which, by the way, accounts for roughly two-thirds of the total oil production.

How Does It All Work

The oil market generally works with the use of futures contracts, which is a legal agreement to buy and/or sell a particular commodity asset, which in this case is the oil. Futures contracts allow speculators, businesses, and investors to buy and sell specific amounts of barrels of oil at a set date in the future.

With that in mind, hundreds of contracts are created every day, especially for benchmark oils such as Brent and WTI, not to mention the lesser-known crudes as well. After that, the benchmark oils are announced to the public with a settlement price, which would then be used as a factor in calculating the price of other oil contracts.

Furthermore, oil prices are calculated at any given moment. It will depend on the buy and sell prices of refiners, traders, investors, and every other individual taking a position on the asset. At most, the market price is influenced by supply and demand, in which a declining supply of oil would mean that meeting global demands is going to be difficult, and it could lead to a sudden rise in its market value as a result.

Regarding the oil demand, it’s roughly estimated to reach about 98 million barrels of oil each day, and the emerging market continues to expand day by day. If ever the demand outpaces the supply, the market value of oils will surge significantly.

Getting Started With It

If you’re interested in trading oil extensively, add more diversification into your portfolio, then there are some things that you need to do. Firstly, you must create an account on your preferred trading platform. An example of a good oil trading platform is Oil Profit. Then decide whether you want to trade stocks and ETFs, futures contracts, or spot prices.

Afterwards, you’re now ready to take the next step to open your first position. Then all that’s left is for you to monitor your trade using fundamental and technical analysis to perform educated decisions for a greater profit. With that in mind, you can start trading with oil, and there are two main ways to do so: trading oil futures and trading oil spot prices.

Moreover, you can also trade oil spot prices using CFDs (Contract for Differences), which allows you to trade oil on price movements without initially buying the oil at its spot price. This method doesn’t require investors to take delivery of an asset, especially when the contract matures.

This trading method is typically cost-effective compared to buying futures contracts as individuals are allowed to open a position for a fraction of its total cost, which could lead to leveraging your way to magnify profits, but bear in mind that it would also magnify your risks. Hence it’s highly advisable to manage the risks involved appropriately.

Keeping The Market’s Openings In Mind

As you’re now ready to start oil trading, you must first determine when the oil market will open. Typically, most oil markets are available to the public for trade almost 24 hours a day. Still, you have to acknowledge the trading breaks as it’s essential to determine precisely when each oil market opens and closes so that you can leverage that in creating and modifying trades.

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Naomi Kizhner

Naomi Kizhner

On NaomiKizhner.com, I want to share tips, tricks, and quotes that will hopefully inspire someone who might be struggling. Also, I wish to help others find their true passion in life and cut out any negativity.
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