The Ins and Outs of Trading Oil

If you’re new to trading oil this is a great place to start. Below we answer some common questions asked by first-time oil traders.

Why are 2 types of oil contracts offered?

Oil may look the same to the untrained eye, but in reality there are many different types of crude oil depending on where it is found in the world, and what it is made up of.

To make it easier for global commodity trading the market has devised a system of oil benchmarks, which include Brent and WTI.

Brent is from Europe, which is why it is referred to as European oil, while WTI is from the US, which is why it’s often called US oil. These benchmarks make it much simpler to trade oil, and when someone purchases a Brent and WTI contract they have a good idea where the oil came from and what quality it is.

What to trade – Brent or WTI?

Some people choose to trade Brent if they are based in Europe, while traders based in the US may choose to trade WTI. In reality, though, at FOREX.com you can trade Brent and WTI 24 hours a day 5 days a week, wherever you are in the world.

Why are Brent and WTI different prices?

Typically Brent and WTI move in the same direction, but they are very rarely the same price. In recent years Brent has traded at a premium to WTI due to an oversupply of WTI, which made US oil cheaper. This means that a Brent contract was more expensive than a WTI contract. Historically this has not always been the case as WTI is considered a better quality crude oil compared to Brent.

How do I trade oil?

Compared to trading forex, where you always buy one currency and sell the other simultaneously, that is NOT the case when trading oil. You either BUY or SELL oil. For example:

• If you think that the price of oil is going to go down in future then you want to sell oil.
• If you think that the price of oil is going up in future then you want to buy oil.

FOREX.com offers a monthly oil future, which is traded slightly differently on our 2 platforms.

• FOREXTrader PRO – The minimum lot is 100 barrels, which is 0.1 of a CFD.
• MT4 – Oil is quoted as contracts of 1. 1 contract is 0.1 of a CFD.

Why is oil priced in dollars?

Oil priced in dollars is a standard global phenomenon. If you read about oil in the financial press you are 99% likely to see it quoted in USD, so we have adopted the same standard.

This is why trading oil can be a nice complement to trading FX. Since oil is priced in US dollars, it can be impacted by movement in the USD, although this is only one factor that can impact the oil price.

The major players in the oil market:

The world’s top 5 largest oil producers are: Russia, Saudi Arabia, United States, China, and Canada. Watch out for any headlines about these countries; if there is any threat to their oil production, particularly in Saudi Arabia and Russia, then this has the potential to put upward pressure on the oil price.

The importance of OPEC:

This stands for the Organisation of the Petroleum Exporting Countries. It is is an organisation made up of some of the world’s largest oil producers, its mandate is to protect the interest of oil suppliers, coordinate oil prices and ensure the “stabilisation” of oil markets around the world. Members include Saudi Arabia, Venezuela, Nigeria and the UAE.

OPEC have been known to intervene in oil markets by coordinating production cuts or increases among its members to impact the oil price. This makes them a controversial force in the oil market.

Due to this, when OPEC members meet at their headquarters in Vienna, usually twice a year, watch out for what agreements are made, as Opec can move the price of oil.

Other factors that can affect the oil price:

• Supply and demand: how much oil there is in the world can have a big impact. Oversupply can weigh on the price of oil, while a limited supply can push the price of oil higher.
• Geopolitical issues: particularly tensions in the Middle East that could threaten the production and distribution of oil in Saudi Arabia, the world’s largest oil producer.
• Weather: if you hear that a storm or a hurricane is threatening an oil field this can put upward pressure on the price of oil. Usually this effects oil produced in the US, which has more extreme weather conditions than Europe. However, it can also put upward pressure on the price of Brent, as well as WTI, as the market worries about a tightening in oil supply.
• Economics: Global growth can determine the price of oil. If growth is weak then demand for oil may be lower, which could weigh on the price. If growth is strong, then demand for oil may rise, which could boost the price of oil. Worth noting, China is a major part of the oil demand story as well as the oil production story. When its economy is strong this can boost the price of oil, while the price of oil can fall when China’s economy looks weak.

Need to know more?

If you need any further assistance please contact our Client Support team.
 
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