Crude Oil- Basics & Fundamentals

CRUDE OIL

Crude Oil is a basic and critical component in the global economy & according to the International Energy Agency (IEA), the total global consumption of oil is about 93 million barrels per day.

This commodity has a large impact on our daily lives, which is why it is closely followed by economists, businesses, and traders alike.

From a trader’s perspective, crude oil is one of the most-traded commodities in the world and is used as a tool for speculation, investment, hedging, diversification and more.


Types of Crude Oil

WTI:

Stands for West Texas Intermediate. This is one of the most popular and well-known benchmarks for trading oil, also referred to as US Crude WTI which is a high-quality crude oil that is exported and used around the world. Refined in the United States, WTI is a light and sweet crude oil and was traditionally priced $1 to $2 higher than Brent Crude.

WTI is also an oil benchmark, meaning that its price serves as a reference for buyers and sellers of crude oil, and is also quoted in the media as the price of oil.

Brent Crude:

Refers to North Sea Brent crude and is the second popular benchmark for trading oil. Like WTI, Brent crude also serves as a benchmark for oil prices and is a primary oil type in Europe and North Africa. Brent crude oil is mostly extracted from the North Sea and refined in Northwest Europe.

OPEC Basket:

After WTI and Brent crude oil, OPEC oil is another important player in the global oil market. OPEC (Organization of Petroleum-Exporting Countries) is one of the major players in the oil industry. OPEC oil is a combination of seven different types of crude oil, coming from Saudi Arabia, Nigeria, Algeria, Dubai, Venezuela, Indonesia and Mexican Isthmus. Less sweet and darker than both WTI and Brent, OPEC oil tends to be cheaper but is still important on the global market.


Crude Oil comparison: Brent vs WTI

While both Brent and WTI crude oil are the most popular instruments for trading, there are some key differences between the two oils:

  • Extraction location: WTI crude oil is extracted and produced in the US - mainly in Texas, North Dakota and Louisiana. Meanwhile, Brent crude is largely extracted from the oil fields in the North Sea.

  • Oil trading options: Brent and WTI also have different trading options, including futures contracts and CFDs. Futures contracts for each oil are managed on different exchanges (WTI via the New York Mercantile Exchange, and Brent via the Intercontinental Exchange) ICE

  • But many CFD brokers will offer the option to trade both via the same broker and platform.


What Affects the Price of Oil?

The price movement of oil is important - for traders, investors, and global economies.

Oil prices are frequently changing - day by day, minute by minute and the prices are influenced by a wide range of factors.

  • Increase or decrease in supply by the oil producers
  • Increase or decrease in demand by the oil users and importers
  • International politics (agreements between countries)
  • Worldwide supply of oil
  • Geopolitical tensions and insecurity
  • Usage of oil and its fundamental outlook
  • And somewhat surprisingly by tweets made by the US President

The Benefits of Trading Oil

Being one of the world’s most popular assets for trading and investment, there are a range of benefits for trading crude oil.

Volatility

The volatility in oil prices is probably the biggest advantage of trading WTI and Brent crude. The substantial price movement offers the potential for traders to capitalize on these movements through intra-day trading, intra-week trading or swing trading and scalping.

Diversification

Many traders and investors struggle with having all of their eggs in one basket.

The danger of this is that if a single market goes down, an investor’s entire portfolio can be wiped out. Commodities are helpful during periods of global economic uncertainty because they tend to retain their value even during market turbulence. Thus investing in commodities like crude oil is one way that traders can diversify their portfolios and manage their risks.

Trade the fundamentals

Many markets are intimidating to new traders because they seem to rely on technical signals. Crude oil, however, is still heavily influenced by fundamental events. This means that interesting trading opportunities exist based on basic fundamentals.

Speculating on Oil Prices

There are often wild swings in commodities prices & trading in oil futures and derivatives is a way to profit quickly from movement in oil prices, which are notoriously volatile. It’s not unheard of for prices to move 5% or 10% or more in a single trading session.

The volumes can be huge since it’s not only the Wall Street speculators trading oil volatility; many major institutional traders buy oil-linked investments for their endowment and pension funds. Perhaps the biggest advantage of trading oil is that demand is virtually guaranteed. There may be fluctuations in supply—and therefore price—but for the foreseeable future the demand is unlikely to flatline or disappear. Experienced traders with a high tolerance for risk can make substantial profits on low capital outlays, especially with CFDs, but also with oil ETFs and futures contracts.

Sunil Mangwani

Director and Chief Technical Analyst