How to start oil trading
Rebecca Cattlin February 4, 2021 3:02 AM
Oil is the most heavily traded commodity on the market. It’s bought and sold by speculators, funds and investors, as well as oil producers and refiners who want to hedge their exposure. Discover how to start trading oil – including how the oil market works and what moves its price.
What is oil trading?
Oil trading is the act of buying and selling oil to make a profit – whether this is exchanging the physical commodity or speculating on its market price. The oil market is extremely popular due to the volatility caused by changes in supply and demand.
What oil markets can you trade?
There are hundreds of types of crude oil, which are traded all over the world and used as a vital source of energy. When you see ‘oil markets’ in the news or on trading platforms, they’re referring to oil benchmarks, which are certain types of crude oil that are then used to price other – smaller and more independently produced – types of oil.
The two main benchmarks are:
- West Texas Intermediary (WTI) – this is the main benchmark for oil prices, used all over the world to gauge supply and demand. It’s produced in North America, and its futures are traded on the New York Mercantile Exchange (NYMEX) division of the Chicago Mercantile Exchange (CME)
- Brent Crude – this oil blend is sweet, light crude oil, first extracted from Brent oil fields in the North Sea. Brent Crude futures trade on the Intercontinental Exchange. It’s the leading benchmark for oil prices across African, European and Middle Eastern crude markets, which account for roughly two-thirds of oil production
Each crude oil has distinctive qualities depending on where it’s made and refined, and so will have a higher or lower market value than that of the benchmark oil based on how close in consistency they are to each other. For example, a heavy crude from Saudi Arabia is cheaper than WTI, as it has a lower percentage of gasoline and diesel when converted.
Although the price of a benchmark will fluctuate, the price of other crude oils will always remain the same in relation to it. So, if the heavy oil is $3 cheaper per barrel than WTI, regardless of how much WTI rises or falls in price, the heavy oil will always be $3 less.
There are other types of oil markets available, such as Gas Oil – also known as petrol or gasoline, which is used primarily for filling cars and agricultural activities – and Heating Oil, which is a petroleum product used to heat homes.
How do oil markets work?
Oil markets work using futures contracts, which enable investors, speculators and businesses to buy and sell barrels of oil for set prices on a set date in the future. Hundreds of millions of futures contracts are traded every day, for benchmark oils such as WTI and Brent, as well as lesser-known crudes.
At the end of the day, a settlement price of the benchmark oils would be announced, which would then be used to calculate the price of other oil contracts.
The oil price at any given moment is calculated from all the buy and sell prices of traders, refiners, funds, and individuals taking a position on crude. These will be influenced by:
- Supply – global oil supply has fallen every year since 2014 as global oil reserves become depleted and explorations cease to be successful. Declining supply means it will become more difficult to meet global demand, which could lead to a sharp rise in prices. In the short term, any periods of reduced demand could flood the market with supply – although the Organisation of Petroleum Exporting Countries (OPEC) usually intervenes to prevent this
- Demand – global oil demand is estimated to reach 98 million barrels a day in 2021, as emerging market economies continue to expand. If demand outstrips supply, the price of oil will rise significantly. The demand for energy sources could hasten the move to alternative fuels, and add further pressure to the oil market
How to trade oil markets with FOREX.com
You can get exposure to oil markets through our Small Global Oil Index (SMGO), which combines crude oil benchmarks into a single index. It represents more of the oil market than you’d get access to in a single position, but reduces your exposure to specific geopolitical events.
Find out more about our Small Exchange futures products.
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