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Saturday, April 20, 2024

Investing in Commodities: Crude Oil Trading

Many new and experienced traders choose to buy and sell various commodities to make a profit, such as gold, silver, natural gas, and even coffee. Yet, more traders are turning to crude oil due to its market volatility and standing in the global economy and international politics.

There are many ways to start trading in oil, as you could buy and sell the physical commodity or speculate on its price. If this sounds ideal, you’ll need to learn more about the various ways to trade, such as oil futures, oil spot prices, and oil options. If you’re eager to start investing in commodities, keep reading to learn about crude oil trading.

Know When to Buy and Sell

Supply and demand impact crude oil trading movements, as it is determined by economic prosperity and international output. Many traders may choose to sell crude oil during times of oversupply and less demand, but increased demand and reduced production may result in higher bids for the essential commodity.

Various factors can affect the market price of oil. For example, oil demand tends to increase during economic prosperity, as it is sought-after to meet the increased needs of energy, transport, manufacturing, and pharmaceutical industries. However, if supply cannot keep up with demand, oil prices will skyrocket.

If oil production continues when demand declines, a crude oil surplus can cause storage concerns. As there are limits to how much oil can be stored in tanks, the price of oil can plummet. For instance, it became negative for the first time in April 2020, as crude oil futures declined, and oil storage capacities were pushed to their limits. Also, as more people are using alternative resources to generate power, such as wind, solar, and hydroelectric, the increased usage could result in a lower demand for oil and impact its price.

Learn the Difference Between WTI and Brent Crude Oil

There are two main markets for crude oil trading: West Texas Intermediate (WTI) Crude and Brent Crude. WTI is extracted from the Permian Basin in Texas, as well as other nearby sources, and Brent crude is extracted from 15 oil fields across the North Atlantic. Each option has differing API gravity and sulphur content. For example, Brent oil has a low sulphur content, which makes it a sweet oil that’s perfect for use as gasoline and diesel oil. However, WTI is a sweet and light oil with a low density and is typically used for gasoline refining.

Understand the Different Ways to Trade Crude Oil

As mentioned, there are three ways to trade crude oil. Oil spot trading requires traders to buy and sell oil assets for the current market price and not for a future date. It is a popular trading option, as it doesn’t have a fixed expiry date and often has much lower spreads.

Alternatively, oil futures are a financial contract between a buyer and seller, with the latter trading a specific amount of oil barrels for a fixed price at a future date. The contract indicates how much they believe the oil will be worth once the future expires. Many companies use futures to secure a superb price for oil and hedge against negative price movements in the market.

Oil options are similar to oil futures, as they require a buyer and seller to enter a contract to purchase crude oil at a pre-determined price. However, unlike oil futures, oil options traders have no obligation to buy. Also, you can choose from two types of options: calls and puts. Traders often buy a call option when they believe oil market prices will rise, and they will buy a put if they suspect the prices will fall.

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