What is Oil Trading – Guide

Oil trading is referred to the buy and sells the oil for making profit. This can be done either by purchasing the actual product or by guessing the price. Oil is the world’s most traded commodity, and prices affect the global economy in many ways. But is investing in oil a good idea? What are the risks and benefits? But most importantly, what are the different ways to invest in oil and how to predict changes in oil prices?

This comprehensive oil trading guide is designed to answer all of these questions and guide you step-by-step through your oil investment.

What is Oil Trading?

what is oil trading

Oil trading is referred to the buy and sells the oil for making profit. This can be done either by purchasing the actual product or by guessing the price. Since oil is a finite resource, its price can fluctuate significantly with changes in supply and demand. The volatility of oil is very popular with traders.

Crude oil is a very popular commodity as it is the world’s main energy source. As a natural fossil fuel, it can be refined into various products such as gasoline, diesel, lubricating oil, wax, and other petrochemical products. Demand is high, trading volume is high, and liquidity is very high. Thus, oil trading entails narrow spreads, clear graphic patterns, and high volatility.

Oil Trading Price

Crude oil is one of the world’s most valuable raw materials. Changes in the price of these products can affect all levels of the economic ecosystem, from household budgets to corporate profits and national GDP. A sudden price drop or unexpected surge can shake up global financial markets. Crude oil prices change rapidly with news cycles, policy changes, and fluctuations in global markets. Let’s take a closer look at the factors that determine the price and performance of oil in financial markets.

Purchasing, OPEC and Geopolitics

OPEC image

For decades, the Organization of Petroleum Exporting Countries (OPEC) has had a significant impact on oil as oil-producing countries work together to set prices by increasing or decreasing production. Although OPEC’s market power has softened somewhat in recent years, OPEC’s decisions continue to play a dominant role. All OPEC decisions are closely monitored by all economic and market participants.

Impact of Oil Demand

Strong economic growth and industrial production tend to stimulate oil demand, as evidenced by changes in demand in non-OECD countries that have increased significantly in recent years. Factors that affect oil demand are transportation, population, and natural calamities. For example, oil consumption increases during the peak summer season and winter, when diesel consumption for heating is high.

Ways of Oil Trading

There are many ways to invest in oil, either in the commodities themselves or in the oil sector. This section provides a comprehensive list of different options for investing in oil.

Invest in oil through CFD trading

Contracts for difference, or CFDs, are one of the most popular ways to invest cheaply in oil. By guessing about the difference in the price of oil between the opening and closing of a transaction, you are not buying the price of oil itself.

Oil Trading - CFD

There are often no fees required to trade CFDs for oil because CFD brokers benefit from the spreads. Flexibility is the key advantage of CFD trading. A standard oil futures contract is 1,000 barrels, but CFDs allow you to trade much less.

Investing in oil through oil stocks

Another way to invest in crude oil is to buy stocks in the oil industry. In this case, in addition to tracking world oil prices, you should study the production potential of a particular oil company to determine when to invest and invest in oil-related stocks.

Investing in oil through Future Contracts

Oil Trading future

Futures contracts are considered one of the most direct ways to trade commodities without buying actual barrels. When you buy futures, you are buying a contract to buy oil at a predetermined price on a specific future date. Because most people don’t have adequate storage facilities or distribution channels, they usually think of oil futures trading when talking about oil trading.

Oil futures are the most traded futures contracts on the market and are highly liquid. However, oil futures are highly volatile as it is very difficult to predict future oil price movements.

Investing in oil through ETFs

Exchange-Traded Funds (ETFs) are another option to consider for oil trading. By giving you access to different sets of assets at the same time, ETFs diversify your portfolio and prevent you from choosing more than one security to trade-in.

Fundamentally, ETFs can be bought and sold just like common stocks. The main advantage of trading oil ETFs is that you can diversify into the broader oil industry rather than taking the risk of trading individual stocks that are highly volatile.

Oil Trading Companies

Although this article has mainly focused on oil value trading, you may want to consider buying stocks of commercial oil and gas companies that are in the field. You are less interested in short-term price trends. Instead, it invests in the future value of the oil company.

In theory, there is a direct correlation between the market value of oil and the price of a company’s stock. For example, major oil stocks plummeted in weeks when oil prices fell below $20 a barrel due to the Covid-19 lockdown.

However, buying oil stocks allows you to invest in commodities without taking an active role. This means that once you have invested, you have nothing else to do until you decide to withdraw your stock. Or, if you want to invest in long-term values, consider the UK Petroleum ETF. The ETF provider of your choice is buying and selling oil stocks on your behalf. Six biggest oil companies of the world-

  • Saudi Aramco
  • Royal Dutch of Shell
  • BP
  • Exxon Mobil
  • Total SA
  • Chevron Corporation

How to make money via oil trading

When you trade-in oil stocks you make the capital gain. While trading in oil stocks you make the money at the time of entry and exit the trading position. With the help of an example, we will show you that how you can make money with oil. Suppose you are placing the order to buy £1,000 oil CFDs. a few weeks later the prices of oil go up 20%. Now your CFD composition stands at £1,200. After this, you decided to close the position by sell order. Here you will gain £200 as a capital gain.

Oil Trading - make money

However, if you want to combine capital gains with dividends, investing in oil stocks may be more appropriate. You can choose individual companies like BP, Tullow Oil, Premier Oil, or choose an ETF.

Oil Trading risks

Every future investment contains some risk because the future is uncertain. Just like other investments oil trading also contains so many risks because the oil market is so volatile. Here we are discussing the major risks that you will face in oil trading.

Volatility in Oil Inventories

Operating costs can have a significant impact on project costs. Operating costs depend on many factors, such as the difficulty of drilling, the cost of hiring and maintaining skilled workers, and unforeseen problems or concerns during the drilling or fracturing process.

Oil price volatility

Oil prices fluctuate significantly due to many macroeconomic and cyclical factors. Due to market dynamics, it can be difficult to predict when oil prices will reach lows or highs.

Exploration risk

Exploration is a high-risk activity. Promising reserves can turn out to be dry holes. On the other hand, technology can be too successful. Advances in the extraction of energy reserves such as fracking have led to record reserves and lower prices.

Oil Trading Strategies

Experienced oil traders usually have a strategy. Every trading strategy is different, and risk management is an important component of consistent trading, such as using leverage effectively and avoiding serious trading mistakes.

Once traders understand the basic supply and demand factors that affect oil prices, they can use technical analysis to search for market entry. Then, when technical analysis identifies buy or sell signals, traders can apply the right risk management techniques.

Listen to OPEC

You can use all the advanced technical indicators and pricing algorithms you want. In the world of British oil trading, nothing is more important than OPEC. In other words, when OPEC speaks, you have to listen. Immediate oil price action is expected when an organization issues an oral or written statement. For the opportunity to make the most of OPEC’s presentations, we recommend watching the live semi-annual meeting. You can check it directly on the OPEC website.

Fundamental Analysis

While OPEC plays an important role in oil supply and demand, it must broaden its horizons to keep pace with other important developments. The point here is that you can trade oil based on big news and geopolitical developments. To achieve this goal, we recommend that you sign up for a news website. By adding Oil to your watchlist, you can choose to receive real-time notifications whenever relevant news items are released.

Technical analysis

Some UK oil traders focus only on technical analysis. In other words, you study detailed charts to find price trends. The trader will then evaluate how these trends might affect the future value of the oil. This requires familiarity with how to read and interpret charts as well as the use of technical indicators. It includes everything from Bollinger Bands, Fibonacci retracements, MACD and RSI.

Oil Trading Tips

If you are new to the oil sector or investing in the oil sector in general, you should know that there are a few basic rules and tips to consider.

Invest in a Diversified Portfolio

Integrators in the oil and gas sector engage in both upstream and downstream activities such as production, refining, distribution, and services. Working at different stages of production around the world offers a better range of risks. When one well dries, another is commissioned or put into production. Because of this, it’s important to diversify your portfolio rather than putting all your eggs in one basket.

Analysis of the price-book value relationship

A price-to-book (P/B) ratio can be used to determine whether oil stocks are undervalued or overvalued. This indicator tells you whether the stock price reflects the book value of a company. To find the book value, divide the stock price by the book value per share.

Merger & Acquisition monitoring

Big Oil is also looking for undervalued companies. Pre-acquisition M&A activities provide attractive investment opportunities. With stock prices falling sharply, large corporations are rushing to buy cheap assets. When you join a company, the stock price often goes up.

Invest in companies that can survive a severe recession

Investors should invest in sustainable oil companies that will last long enough. Of course, you should stick with bigger oil companies like ExxonMobil and ConocoPhillips first, which have good balance sheets, good cash flow, and pay dividends. These are companies that can survive serious crises because they are designed to last.

Think long term

The oil industry can be very volatile in the short term, so the key to investing in oil is to invest in the long term. The sector sometimes experiences stagnation when oil supply exceeds demand more than expected.

Oil Trading UK- Pros & Cons

After discussing everything about oil trading now it is time to discuss the pros and cons of oil trading. There are so many advantages of oil trading but there are some cons also that we should keep in mind always.

Pros

First, we talk about the advantages and benefits of oil trading. Few advantages are-

High-Profit Margins

Oil exploration is an activity that requires significant investment. However, once oil reserves are produced, wells can provide a source of income for 20 or 50 years. Therefore, the profitability of productive wells is very high.

Investing in oil regularly can pay off

The dividend flow makes oil stocks an attractive investment for income-oriented investors. Several large integrated oil companies pay dividends of 5% or more.

Financial benefits

Many investment vehicles in the energy sector offer tax benefits. One of them is the Master Limited Partnership (MLP), a publicly-traded company that invests in oil and gas facilities. MLPs enjoy the tax advantages of partnerships rather than corporate structures.

The solution to the recession

If oil and gas prices rise, the economy can grow more slowly. This is because it costs more to run a business, transportation, and home. This inverse relationship makes oil reserves a good buffer against recessions.

Potentially big returns from oil trading

Over the past 15 years, the Energy Select SPDR ETF investing in oil and gas companies has outperformed Dow Jones Industrial by 200%. Soon, it is expected that increasing demand for oil and gas will drive up prices while supply will continue to decline, increasing the potential return for investors.

Cons

After discussing advantages now its time to discuss some disadvantages that we should keep in mind before commencing trading-

Volatility in Oil Inventories

Operating costs can have a significant impact on project costs. Operating costs depend on many factors, such as the difficulty of drilling, the cost of hiring and maintaining skilled workers, and unforeseen problems or concerns during the drilling or fracturing process.

Oil price volatility

Oil prices fluctuate significantly due to many macroeconomic and cyclical factors. Due to market dynamics, it can be difficult to predict when oil prices will reach lows or highs.

Exploration risk

Exploration is a high-risk activity. Promising reserves can turn out to be dry holes. On the other hand, technology can be too successful. Advances in the extraction of energy reserves such as fracking have led to record reserves and lower prices.

How to start Oil Trading- Full Tutorial

Investing in oil can be done in many ways, but the best way to invest in oil is through an online broker like eToro. Among all the online securities brokers offering investments in oil, eToro is the best. It is suitable for traders of all levels and offers a very ergonomic trading platform for oil trading. Oil trading online is very simple and consists of the steps listed below-

oil trading account eToro

Step 1: Open an account

Opening an account with an eToro broker is a very simple process. You are needed to visit the official site of eToro to create an account for trading in the oil market. To create the account you are needed to provide your basic information such as full name, email address, and phone number.

Step 2: Verify your account

You will need to verify your account by sending your ID and proof of address to access the actual transaction and make the initial deposit. You will also be asked to answer any questions about your market experience and investor profile. This is the KYC or Know Your Customer process that all regulated brokers follow to ensure that traders are aware of the risks of trading financial markets. This is a legal requirement.

oil trading account eToro - verification

Step 3: Deposit the funds

After verifying your account, you will need to deposit funds to start trading oil. To do this first of all click “My Account” and then “Deposit”. After this enter the amount that you want to deposit and select currency and payment method. For the first deposit, the minimum amount is $200 from the online broker eToro. eToro accepts the payment via debit/credit card, bank transfer, wire transfer, e-wallet, etc.

Step 4: Choose a way to invest in oil

There are several ways to invest in oil, and at this stage, you need to choose exactly which product to use for oil trading.eToro gives you access to Oil CFDs, Oil Shares, and Oil ETFs.Click on the “Market” link on the left side of the eToro platform interface for research. You can also search for the product name you want to invest in directly in the search bar at the top of the platform.

Conclusion

Oil trading has many advantages despite some disadvantages. It undoubtedly remains an essential market for traders. The oil market is so volatile so it opens so many opportunities to short-term investors. Long-term investors will prefer to look for stocks in oil companies that are correlated with oil prices as well as pay comfortable dividends. There are also a variety of avenues for investing in oil to help each investor find one that suits their needs. In this guide, we have covered all the crucial points related to trading in the oil market. If you read this guide thoroughly and carefully then you can easily start oil trading through an online broker like eToro.

FAQs

Is this the right time for oil trading?

Stock prices of oil and oil companies have fallen sharply given the coronavirus crisis. One of the fundamental principles of investing is to buy low and sell high. However, rarely, oil sinks as deeply as it is now. So even with great uncertainty about when oil will rise significantly, this is a good time to invest.

Could oil prices be negative?

A combination of declining demand, oversupply, and a full supply of oil could lead to a negative oil price drop for the first time in gold history. May 2020 is black given the devastating economic consequences of the Covid-19 coronavirus pandemic.

Which way should be used to invest in oil?

It depends on the investor profile. If you want to trade short-term oil for a small amount of money, CFDs are for you. For larger funds, futures are also attractive. For long-term investments, oil company stocks or ETFs are more suitable.

What is the best online broker to invest in oil?

The online broker eToro is one of the market leaders and offers many options for investing in oil. With an impeccable reputation and well-regulated, it is a safe option for beginners as well as experienced traders and investors.

Which company is the top listed oil company today?

The world’s largest oil company is Saudi Aramco, Saudi Arabia’s state-owned oil company, which liquidated a portion of its capital in 2019. The company had revenues of $355.9 billion in 2018.