How to Trade Crude Oil Like an Expert
Energy commodities trading is a high-stakes game which undergoes constant change. This is especially true for crude oil, the market for which is turbulent and volatile. But don’t be put off by this. The energy sector has become increasingly volatile over the past few years and crude oil trading has benefited from these strong trends.
Crude oil is one of the most traded commodities. It has a significant standing in the global economic systems. No other commodity plays such a large role in international politics and economic decisions.
Crude oil trading offers an excellent opportunity for profit and also high liquidity. Studying and reacting quickly to the strong ups and downs in the crude oil market can produce consistent returns if you use wise timing in your long-term trading strategy or you can take advantage of swing trades if your focus is more short term.
It is not hard to produce consistent returns from these turbulent energy commodities markets once you learn how to trade crude oil and maximize your profit. A major part of any trading strategy will involve reacting to market fluctuations and learning about different pitfalls.
Understand the Factors Influencing Crude Oil Prices
Like any other commodity, crude oil price is affected by actual supply and demand as well as the perceptions of supply and demand. Worldwide production levels and global economic outlook are also major influential factors on the price. Major uptrends in price occur when there is a simultaneous occurrence of positive factors, such as declining production, high demand, etc.). A particularly powerful uptrend happened in April 2008, when crude oil prices rose to 145 USD per barrel. http://thecanadianpress-a.akamaihd.net/graphics/2015/static/cp-10yr-crude-oil-price-dec-18-2015.png
Primary Crude Oil Markets
West Texas Intermediate and Brent are the two grades of crude oil used as primary pricing benchmarks in trading. These are basically different grades of crude. WTI, also called sweet crude, has a comparatively lower density and low sulfur content than Brent.
The price difference between them has traditionally remained within a narrow range, but the trends bifurcated sharply in 2010 due to rapid increase in supply of WTI from the US and a decrease in the drilling of Brent crude.
The future contracts for the WTI benchmark are tracked by NYMEX using the “CL” ticker. This has attracted a lot of interest from futures traders. Most futures traders focus on crude oil futures and its other equity derivatives such as ETN (Exchange Traded Notes) and ETF (Exchange Traded Funds).
Choose Your Venue
The most popular venue for crude oil trade is the NYMEX WTI Light Sweet Crude Oil CL futures contract. The total number of trades per month is well above 10 million and offers excellent liquidity. The only negative aspect is that the contract unit is 1000 barrels with a minimum price fluctuation of .01/ barrel. The risk increases due to these limitations.
If you choose to play crude oil via equities then USO (US Oil Fund) is the most popular option. Their average daily trade volume is over 20 million shares. This instrument also tracks WTI futures but can be susceptible to contango. If you wish to try another option, there’s also the iPath S&P Goldman Sachs Crude Oil Trust ETN.
You can also explore some of the largest oil company funds such as:
- SPDR Energy Select Sector ETF (XLE)
- iShares U.S. Energy ETF (IYE)
- SPDR S&P Oil and Gas Exploration and Production ETF (XOP)
- Market Vectors Oil Services ETF (OIH)
You can also play on crude oil indirectly by investing in the stocks of companies involved in the exploration, extraction and supply of crude oil. A few of the major players are:
- Exxon Mobil Corporation (XOM)
- Chevron Corporation (CVX)
- British Petroleum Plc. (BP)
- Transocean Ltd. (RIG)
- ConocoPhillips (COP)
Conclusion
The energy markets offer lots of opportunity for anyone willing to take the time to research and learn about market fluctuations and the reasons behind them. To minimize risk and maximize learning it is recommended that you practice using virtual stocks that mimic real world trading.
Build a good trading strategy and remember to refine it constantly if you want to remain ahead of the turbulent energy sector trends.
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