The volatility of oil prices that go up and down provides an opportunity for speculators to profit from changes in oil prices through trade oil CFD.
Oil trading on financial markets belongs to the category of industry in energy commodities. In the world, the oil and gas industry produces various international products, including Brent crude oil and WTI crude oil, as well as natural gas for household needs, or home heating.
For those of you who are experienced in forex, you may have heard of trade oil CFD. But for those of you who are new to online trading platforms, this might sound a little strange to your ears and ask, what is CFD oil trading?
Contents
About trade Oil CFD
International oil trading is usually done on oil exchanges such as NYMEX and ICE. NYMEX is the New York Mercantile Exchange that trades WTI oil, while ICE is the Intercontinental Exchange in London that trades Brent oil.
On the two global oil exchanges, there are oil futures trading transactions of each type between Brent and WTI.
Trade oil CFD, or Contract For Difference, is a model of trading oil without owning the underlying asset. Here traders or more closely referred to as speculators, try to trade oil for profit from changes in oil prices up and down. Not from physical trading of oil like buying fuel to get fuel.
So for example the current price of oil is $110 per barrel, then the speculator buys oil on the CFD trading platform, then the next day or a few hours later the price changes to $111 and the speculator decides to resell it. So he gets a profit whose amount depends on the trading volume and leverage used.
Trade Oil CFD uses leverage, which allows one to buy at a smaller fraction size. Usually, CFD brokers offer oil leverage up to 1:10. If in oil trading the minimum purchase is 1000 barrels, in trade oi CFD you can buy a smaller size. Using leverage and magnifying profit but also the risk is higher.
Why trade Oil CFDs?
CFD trading makes it possible to start with lower capital. It is more suitable for speculators who want to profit from changes in oil prices without having to buy according to 1000 barrel contracts which require larger funds to trade the minimum contract size.
Trade oil CFDs also allow for the potential for two-way profit, whether prices are rising or falling.
Another advantage is trade oil CFDs using leverage, the average broker offers up to 1:10. This means that with small capital traders have the opportunity to get 10 times more profits. However, leverage also increases the risk.
Oil CFD trading also allows traders to hold their positions in the long term or what is called position trading, on the basis of the trader’s analysis they believe that oil prices will rise in the long term.
Traders can also make short-term trades, as they may be concerned that price volatility changes quickly.
Trade oil CFDs also allow traders to make lot size transactions with a small fraction by selecting the smallest position or lot size.
How does Oil trading work?
Trade oil CFD has a different concept from trading futures contracts. In CFD trading, traders use leverage open trade positions with the required margin requirements to make one transaction.
Say a CFD broker providing oil trading offers 1:10 leverage. To open a contract size, the trader only guarantees 10% of the actual contract value. The rest was borrowed from the broker. However, the term borrowing is actually not quite right, because the trader does not have to pay the loan if his position ends in a loss.
The way oil CFD trades work is similar to forex trading in general. When a trader makes a buy or sells order, he will be able to see the value of his equity rise and fall following the ups and downs of the price.
At a certain level when the margin level reaches the margin call threshold, the broker will close the transaction automatically. However, if the transaction is facing floating profit, it will be up to the trader to complete the transaction with a close order or keep an order opened.
How to start trade Oil CFD?
The steps to trade oil CFDs are easier than trading on the ICE or NYMEX oil exchanges.
- The first step, find a CFD online broker that provides commodity markets for oil. Let’s say FXOpen, TenkoFX, etc. You may find a list of instruments in the commodity market with the symbols XTIUSD for US oil and XBRUSD for UK oil.
- The second step is to register on the respective broker and provide real data, both email addresses, names, and addresses that actually match your domicile.
- In the third step, you may be asked to verify your account. Because it is an international regulation to comply with KYC and AML. The verification process requires an ID card, and proof of address, such as a utility bill or bank statement. You may be asked to hold an ID card for a selfie, to make sure you are real.
- The fourth step, create a trading account, each broker may have different steps, there are brokers at the time of registering directly to get a trading account number. There are also those who create trading accounts through the trader’s cabinet.
- In the fifth step, funding the trading account, you can choose the payment method accepted by the respective broker. Maybe Visa, Mastercard, Skrill, Bank transfer. Brokers set a minimum deposit on their account type. Oil CFD trades are usually available on ECN account types. Some set a minimum ECN account deposit of $100, some are $200 and some are even $2000. Make sure the broker you choose has a minimum deposit of the amount you prepared.
- In the sixth step, use the available trading platform to log in to the trading account that you have deposited with the account number and password with the given trading server. Most broker CFD trading platforms use Metatrader 4, however, some brokers develop their own platforms. You can choose the platform you like, maybe a web trader using a browser without the hassle of installing an application, or using a platform that needs to be installed on your computer.
- Finally, find the Oil trading instrument on the trading platform and you can immediately make buy and sell transactions using the trading platform. Usually, you can find oil in energy commodities.
Oil trading Futures
Oil futures trading is the most common way of trading oil. This is done through exchanges like CBOT, CME, and NYMEX.
The concept of trading oil futures is that the transaction has an expiration time, maybe monthly or quarterly. Traders can determine a certain price in the expired period or a predetermined price.
If the price is reached, the trader will have the order, and if the price goes up, he can close the order or wait for it to expire.
However, if at the expiration time the price is below the order price, the trader will get a loss.
The size of the oil futures trading contract for either WTI or Brent oil is 1000 barrels using prices in USD and cents.
Difference trading Oil Futures vs CFDs
Futures trading and CFD both aim to gain from the underlying asset instrument. But in a nutshell, futures trading is traded on an exchange, while CFDs are traded through brokers.
Futures contracts have more complicated rules than CFDs, which relate to the expiry date, as well as the trading volume. In this case, CFD provides more convenience in relation to transactions.
Meanwhile, in relation to market conditions, futures trading is mostly traded by institutions and different types of investors, with market prices that tend to closely reflect the prices of the underlying assets being handled.
In terms of price, futures are more transparent in tracking the price of the underlying asset, while CFDs mostly take prices from futures, thus allowing for distortion of prices so that they do not find precise prices.
In large volume trades, futures trading is more cost-effective than CFDs. That’s why large institutions prefer futures trading.
However CFD trading has higher liquidity than Futures, meaning whenever a trader requests an order at a price that is always available it allows the trader to hold until he/she completes the order.
Another fundamental difference is that futures trading has an expiration date that forces traders to complete a transaction regardless of the final result of profit or loss. While the biggest strength of CFD trading is that there is no expiration date, which allows traders to hold orders even until the quantity is eroded by price changes
Another method for Oil trading
Another trading method you can trade oil with is through ETFs. This financial product is also another alternative for trading the underlying asset without having to own the asset.
If someone is a big investor, they may choose to buy oil in the spot market, but this requires large storage to store their oil. Meanwhile, for investors who do not want to trade commodity oil but want to profit from price fluctuations, some of the options above, including trading oil futures, options, CFDs, and ETFs, can be an alternative to oil investment.
Brent vs WTI oil price
WTI oil is a type of oil that is produced in the US, mainly in Texas, Louisiana, and North Dakota. Meanwhile, Brent oil is produced in the North Sea. The composition and cargo of oil both have different impacts on price differences.
In general, Brent oil is affected by global geopolitical conditions, instability which causes Brent oil price fluctuations to be higher in volatility than WTI.
In general, Brent oil is affected by global geopolitical conditions, instability which causes Brent oil price fluctuations to be higher in volatility than WTI.
However, with the current OPEC, oil prices can become more relevant to controlling the price balance in terms of demand and supply.
Oil trading tips
Trade oil CFDs, aiming to profit from price changes. The following tips may provide good suggestions for achieving this goal.
Learn why oil prices move?
Oil prices often go up and down in a matter of minutes, by studying the reasons prices move up and down, can be a benchmark in trading. For example, in the long term, the price of oil may rise due to the uncertain geopolitical situation.
In relation to the volume between demand and supply, it can encourage price changes. Oversupply offset by declining demand can cause oil prices to fall. On the other hand, supply that is slightly above high demand causes oil prices to rise.
Understand big market player
Big market players come from professionals and hedgers who invest in the oil market with industry players for long-term and short-term profits.
The existence of big players in oil investment can push prices to move, in line with the expectations of big market players. Rarely is a retail trader able make prices to move.
Choose Brent Oil or WTI
As already explained, there is a price difference between Brent oil and WTI oil, where the price for Brent oil is more reflective of international oil prices. While WTI is mostly traded in futures trading.
The different demand environments for Brent and WTI oil can lead to different price movements. Although the two often have a narrow price difference.
Learn long term chart
Technically it is important to know the long-term trend of oil prices. In the long-term trend, although sometimes there is a retracement wave, the price tends to move towards the major trend point.
Take attention to cost trade
Trade oil CFDs through brokers, each broker offers a transaction fee for their clients. Each CFD broker may offer different transaction fees. And of course, CFD brokers who offer good trading conditions and low fees are preferred by traders.
What drives oil prices?
In general, changes in oil prices are driven by supply and demand. High oil prices can result in increased production costs. The impact of which causes an increase in the price of goods or inflation. Lower oil prices allow for lower production costs and the impact can lead to an increase in economic growth.
Some of the important points that concern the movement of oil prices, briefly are as follows:
- Supply from oil producers, increasing supply, and decreasing supply can cause price changes.
- Market demand. An increase in demand or a decrease in demand can cause prices to change.
- Energy substitute. The emergence of new technologies that can replace the role of oil can affect prices.
- International politics. Oil supply policy agreements between countries can affect oil prices.
- The internal condition of an oil producer. This could trigger a change in oil price policy from producers.
- Geopolitical tensions. This condition can disrupt the supply chain which in turn causes price changes.
- Competition with other energy sources. In the same market, there are two different alternatives that can lead to competition for market share which may affect the price.
Final thought
Oil CFD trading can give traders and speculators the opportunity to gain exposure to changes in oil prices. With low capital, an investor can start trading oil CFDs by choosing a trusted broker.
But you need to be aware, that CFD trading with leverage can magnify your profit but also magnify your loss.
Note: this article is for informational purposes only. This is not investment advice or solicitation. Forex, CFD, and crypto are risky. Each investor is responsible for their investment.
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