3 tips to help you become a successful oil trader
Oil is one of the most actively traded commodities. But with an ever-moving market and so many factors impacting the price – becoming a successful oil trader isn’t easy. However, there are some tips and techniques you can employ that can help you to succeed.
Read on to find out more.
WTI and Brent Crude oil
As a beginner to oil trading, it’s important to first understand the different types of oil. The two main types of crude oil setting the global benchmark for oil prices, and popular amongst traders, are West Texas Intermediate (WTI) oil and Brent Crude Oil.
WTI is sourced from oil fields in the United States, primarily in Texas, as the name suggests. It’s often known as light sweet crude oil, as it has low density and low sulphur content. It’s less expensive to produce and easier to refine.
Brent oil is also described as light and sweet. It comes from 15 different oil fields in the North Sea and covers roughly 66% of all oil contracts.
Different ways to trade
There are a few popular ways to trade oil, each with different advantages and disadvantages. These are:
- Crude oil futures – Generally, the most direct way of oil trading. Oil futures is, in simple terms, an agreement to sell or buy oil at a set date in the future at a particular price.
- Investing in oil stock – Investing in stocks means that the trader will purchase shares in oil companies or oil exchange traded funds (ETFs). This is an investment fund that can give an investor exposure to the oil market, but without needing the more complicated futures account or commitment.
- Trading oil CFDs – A contract for difference (CFD) gives traders the chance to speculate on the price of the commodity, when you predict the market to either rise or fall. However, traders will never actually own the underlying asset. Before trading through CFDs, it is always best to conduct extensive research. For example, you can find out more about how to trade oil CFDs, on the trading platform Plus500.
Once you’ve established what trading style works best for you, then these three tips can help you on your way to become a successful oil trader.
1 – Knowing what drives oil prices
You should learn what could impact the price of oil and use technical analysis to understand the market’s past movements. This will also help to understand the risks involved. For example, the weather, climate change, changes in the energy industry, politics, and natural disasters can all have a major impact on the price of oil.
It’s important to know where your oil is coming from, so you can monitor the risks and factors surrounding the area. One of the biggest factors that can impact price, is supply and demand.
2 – Understanding supply and demand factors
A knowledge of supply and demand is essential in successful oil trading. But what can affect these factors?
Firstly, the supply of oil is monitored by the Organisation of the Petroleum Exporting Countries (OPEC). The OPEC is made up of 14 countries who export petroleum. They have joined together in agreement to regulate the supply and price of oil. Aside from the OPEC, the US, Canada and China are also leading oil producing countries.
You should also be aware of any outages or maintenance of the oil pipelines, which can be caused by breakages or leaks, and therefore disrupting the supply.
When it comes the level of demand, seasonality is key. During cold winters, people rely on oil products to heat their homes and businesses, so demand remains high.
Economic growth is another factor. The US, Europe and China, together, consume around 45 million barrels of crude oil per day. The strength of these economies can significantly affect the price of oil. Demand in other Asian countries, such as Japan, has also grown significantly.
3 – Establishing a strategy
Lastly, forming a strategy before you start trading is the best way to go. The most widely used trading strategy in crude oil trading is called Buy and Hold. By analysing the supply and demand factors, traders will take calculated positions. If their prediction is right, they will close their position in order to profit. Other strategies include technical analysis trading, Swing trading and Spread trading.