All You Need To Know About Oil Trading And How It Works
All You Need To Know About Oil Trading And How It Works
Babyboomers.com Staff

Trading oil entails buying and selling different assets based on one of the most extensively used commodities in the world. Typically, oil trading occurs in Contract For Differences, including futures and cash on platforms such as PrimeXBT. Contrary to popular belief, oil trading doesn’t essentially involve trading the underlying asset (for instance, a physical oil barrel). Instead, a trader will speculate whether the oil price will appreciate or depreciate in the open market.

The oil market comprises two major components: the Brent Crude Oil (BCO) and West Texas Intermediate (WTI). While these components have different pricing, their prices are highly volatile since oil is a finite resource that depends largely on demand and supply factors. As a result, it creates a favorable volatile trading condition for investors.

It will be best to understand why oil is among the most traded commodities globally and how oil trading works as an oil trader. In return, you’ll be able to grasp the underlying market dynamics and generate a strategic trading plan that integrates the essential factors that drive the oil market. Read more to understand how does oil trading work on PrimeXBT.

How does oil trading work?

Within the Brent and WTI categories, various oil products are available for trading. This includes the oil futures market Contract for Differences and the spot oil market. Since all the products have varying characteristics, traders must understand the unique risk and features of each. They include;

  • Contract specifications (rollover, expiry, etc.)
  • Financial proceeding of oil-related companies (upcoming projects, cash flow etc.)
  • Geopolitical risks (government sanctions, OPEC announcements, etc.)  

Thus, by getting a deep understanding of the basic market dynamics, you can develop a trading strategy based on supply and demand, risk, political and economic news. Moreover, you’ll be able to employ technical analysis and fundamental analysis trading plans.

Different Types Of Crude Oil To Trade

Although there are several oil benchmarks, most prices are sensitive to the two primary benchmarks, including Brent Crude and WTI.

Brent Crude Oil

Brent Crude occupies about 60% of the world traded oil. Since it is one of the major oil benchmarks in Europe, Africa, and the Middle East, it is the most widely used price marker. Moreover, Brent Crude is extracted from four oil fields in the North Sea, including Brent, Oseberg, Ekofisk, and Forties, making it easier to transport. Since it is obtained from oil rigs at sea, Brent can be loaded and distributed to the world at a low cost. Many people term the crude from these regions as ‘light’ and ‘sweet’.

West Texas Intermediate

On the other hand, WTI oil is a major benchmark for oil in the United States obtained from wells. However, transporting WTI oil tends to be costlier than Brent since the oil fields are landlocked.

What Factors Determine Oil Prices?

Numerous factors influence the price of oil in the open market. As such, trading oil requires you to stay informed on the latest market trends and economic news that affect oil pricing.

Geopolitics

Geopolitical factors such as the varying stance of OPEC countries impact oil pricing significantly. Moreover, this can further widen the price difference between Brent Crude and WTI.

Economy

When the economy is poor, it drops oil demand, leading to reduced prices. In contrast, as the economy recuperates, oil prices hike due to increased oil demand.

Strength of the Dollar

Since oil is engaged in and pegged to the US dollar, the value of the USD hugely impacts oil prices. Typically, a strengthening dollar will lower prices, while a weakening dollar can increase prices.  

Market speculation

The oil price is set on future markets; thus, speculation on future events can impact prices. As such, traders should beware of news that will likely affect prices.

Global oil production

The OPEC community among major producers, including Canada, China, and the USA, can influence oil supply and price. When output increases, the price reduces and vice versa.

What Are The Advantages Of Trading Oil?

Trading oil CFD on PrimeXBT offers numerous advantages for traders, including;

  • Liquidity
  • Low margin
  • Hedging capabilities
  • Portfolio diversification
  • Immunity against inflation

Besides Oil, there are a variety of markets to trade with PrimeXBT. Choose from the wide of markets to trade using flexible leverage and competitive advantage.





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