Crude oil, also known as Black gold, is a widely traded commodity throughout the globe with more than 100 million barrels as the average daily trading volume. Being a crucial resource for numerous industry types, it has a huge impact on the global economy, making it a preferable choice in the trading world. In this comprehensive guide, we will learn about the ways to trade crude oil, what factors influence crude oil prices, and how to create an effective trading strategy to make it profitable.
Ways to trade Crude Oil
Crude oil can be traded in three popular ways, explained below:
- Oil Spot price– The oil spot price refers to the cost of buying or selling crude oil on the spot, or immediately instead of a set date in the future. Thus, shows the worth of the oil at the current time.
- Oil Futures– Oil futures refer to the contracts in which investors agree to exchange an amount of oil at a designated price on specific set dates, thus, enabling them to trade the rising and falling prices. This is used by companies to lock in the benefits of oil prices and protect against the uncertain conditions leading to price movements.
- Oil Options– Oil Options are similar to oil futures, however, the only difference is that the traders are not obliged to make a trade. With the oil options, traders have the right to buy or sell a said oil amount at a set price on a set expiration date, but they are not obliged to exercise the option.
Is Crude Oil Trading Profitable?
Crude oil trading is undoubtedly one of the most liked types of commodity trading among traders who are interested in diversifying their portfolios and looking for substantial gains. Yes, it is a profitable trading asset but like any other trading form, it also possesses risks. So, it is crucial to understand the factors that can alter the profitability of trading Crude oil. Some of these factors are explained below-
- Supply and Demand – Supply and demand act as the most significant factor affecting the prices of crude oil in the financial market. If the demand for crude oil exceeds the supply, the prices of crude oil may increase. Similarly, if demand decreases, the prices will fall. OPEC, i.e., the Organization of Petroleum Exporting Countries regulates the supply of crude oil by monitoring and controlling its level of production among its member countries, thus, plays a crucial role. So, any change in the policy or production level can hamper the crude oil price.
Additionally, the inventory levels are also important. The weekly US Energy Information Administration (EIA) and other inventory reports equip traders with essential insights regarding the current and future supply of oil.
- Geopolitical Events – Wars, Sanctions, conflicts, and other geopolitical events can disturb production or transportation, resulting in price fluctuations.
- Market sentiments – The overall attitude and perception of a trader towards a particular trading asset is the market sentiment. The market sentiments in the case of crude oil can be affected by factors like technical analysis, news reports, and economic data.
- Currency Fluctuations– Since crude oil is traded in currency, any fluctuation in the exchange rate of the currency can influence the oil prices for those who are buying the asset in other currencies.
Useful Strategies & Tips for Crude Oil Trading
Some of the useful crude oil trading tips and strategies are-
- Technical Analysis Trading Strategy- The trader involved in crude oil trading depends on technical indicators like trading volume, bar charts, candle sticks, etc., helping them in predicting the price movements in crude oil futures. Thus, using the technical indicators, the trader can evaluate the correct time to buy and sell the asset.
- Spread Trading Strategy- In this strategy, the traders buy a crude oil futures contract in the first month and sell another crude oil futures contract in the next month, with the aim to gain profit from the change expected between the buying and selling of the contracts.
- ‘Buy and Hold’ Trading Strategy- It is one of the majorly used crude oil trading strategies where investors and traders evaluate the factors influencing the demand and supply of crude oil and open calculated positions. In a scenario where predictions become reality, the traders can close their position and gain profit before expiry.
- Swing Trading Strategy- In this strategy, the traders buy and hold the position for a short time which can range from a few minutes to up to 3 or 4 days. They do look for short-term changes in candlestick charts, technical analysis, and supply & demand for predicting and determining the market trend. However, this is a risky strategy, and traders can lose all their money quickly in case the market moves in the opposite direction of the desired trend.
Summary:
To sum up, crude oil is a profitable trading commodity, however, it is important to remember that trading crude oil can also lead to a loss of money in times of unfavorable market conditions. Thus, it is essential for traders to possess a complete knowledge of the trading world, do market research, and come up with a well-sound strategy that can minimize the potential risk.
