Oil Trading

Oil trading is bigger than just oil companies delivering to petrol stations – much bigger. It’s difficult to think of a sector that is not influenced by what goes on in the world of “black gold”. The products and derivatives from the oil industry cover everything from aircraft fuel to fertilizers and plastics. The movements in price of oil can fluctuate according to political, financial and even meteorological factors. Changes in price are what create investment opportunities for traders, whether the changes are up or down. There’s also a strong correlation between certain currency rates and oil prices. For example, a weaker US dollar often corresponds to an increase in oil prices, as does a stronger Canadian dollar. This can be explained by the huge quantities of oil imported by the US, and the considerable oil reserves that exist in Canada. However, fluctuations in oil prices can be considerably bigger than currency fluctuations and so therefore can the possibilities to generate profits.

Trading in oil is similar to trading in currencies. Similarity to trading in forex, oil prices are shown as the price of one barrel of oil in US dollars. In the oil trading market, buyers will make offers (bid price), as will sellers (ask price) and the difference between the two prices is, as in forex, called the spread. Oil prices go up or down in “pips” (like forex), the abbreviation for “percentage in points”; one pip is the equivalent of $0.01. Brokers may have different levels for the minimum quantity of oil to be traded. If the minimum amount is 200 barrels for example, then each pip of a price change will mean $2 in profit (or loss) for this minimum amount. You can typically use leverage to open positions as you would if you were trading currencies – the same comments apply to using leverage without creating situations that are overly risky.

When you trade in oil, you trade in fact in oil contracts – in other words, you are trading on the changes in price, but you are not physically acquiring any oil. Oil trades are typically automatically closed on a monthly basis. You take your profit or loss at this point (if you haven’t closed your position before), and if you want to you can instruct your broker to open new position for you for the next month (and at the starting rate for the new month.)

There’s additional scope for investment in the oil trading market, thanks to the different types of oil. Oil comes from different parts of the world and as such has a different composition and suitability for use as fuel, for example. “East Sour Crude”, the oil from Middle East countries such as Kuwait, Iran, Iraq and Saudi Arabia, is more difficult to refine into products such as unleaded gasoline (unleaded petrol). “WTI Crude Oil”, Western Texas Intermediate crude oil is easier to refine and to transport; on the other hand, it’s a rarer commodity than its East Sour Crude counterpart. This difference means that demand for WTI crude oil is usually high and that it is the most liquid oil commodity that you can trade in the online market.

Other related products are Brent oil, from the North Sea, similar to WTI crude oil and suited to the production of gasoline among other derivatives, and gas oil or heating oil as it is called in the US. Heating oil is an example of a type of oil whose price is affected by weather conditions. The opportunities to trade profitably are when the weather is colder than forecast. Factors like these as well as broad economic trends, car sales, and so on can be used for fundamental analysis on how oil prices are likely to change. Technical analysis using past pricing to predict future trends is also important in oil trading.

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