Different Ways to Trade Crude Oil

Trading Crude Oil

CRUDE OIL

Crude Oil is a hugely popular commodity among traders. With supply and demand constantly in flux, volatility is never far away, and there is plenty of liquidity available.

There are 3 ways to trade Crude oil:

  1. CFDs and Spread-Betting
  2. Futures and options.
  3. investing via equities and ETFs.

Oil CFDs & Spread-Betting

CFDs and Spread-Betting enable the trader to deal on the changing prices of futures and options, but without buying and selling the contracts themselves.

And instead of trading on a commodities exchange, the trader creates an account with a leveraged provider, which brings several benefits:

  • The trader can trade on the spot prices of oil benchmarks, as well as futures and options.
  • The trader can ‘buy’ and ‘sell’ on a huge variety of oil markets, on a single platform.
  • Spread-Betting is completely tax-free, while CFD trading is free from stamp duty.
  • Since Oil is a global 24-hour market with constantly moving prices, it’s an ideal market for day-traders to profit from fast movement. It’s also a highly liquid market, so it’s easy to get in or out, regardless of the size of the trade.

CFD’s on Crude Oil

  • A “Contract For Difference” is a contract between a trader and a broker to exchange the difference in value between when a trade is entered and exited.
  • Most CFD brokers provide the facility to speculate on the price of oil futures contracts but contract sizes are typically much smaller than standard futures contracts.
  • A crude oil CFD order can be for as little as 25 barrels compared to 1,000 barrels for a standard futures contract.
  • CFD trades are frequently commission-free, as the broker takes the charges from the spread.
  • Since there is no underlying ownership of the asset, there is no shorting or borrowing cost for trades completed the same trading day.

Spread-Betting in Crude Oil

  • Spread-Betting on oil is leveraged and so whilst you can win more than your initial stake you can also lose more than your initial stake. This means that you should be fully aware of the potential benefits and pitfalls before placing any trades.
  • When Spread-Betting note that there are two major oil markets: Brent Crude Oil, also known in Spread-Betting as UK Crude Oil; US Crude Oil, also known as WTI (West Texas Intermediate)
  • Spread bets on either crude oil market allow an investor to take a long, or a short position on the future price of crude oil.
  • Hence if you believe that the oil market will slump, you can spread bet on oil to go down.
  • When Spread-Betting on Crude Oil you can trade for as little as £0.25 per ¢ of the price movement.

Advantages of CFD’s & Spread-Betting

  • This is one of the easiest ways to access the commodities market, requiring a much smaller investment – smaller bet sizes and deposit requirements.
  • It removes currency risk because you trade in the currency you open your account with.
  • You don’t have to worry about the physical delivery of the actual product – which you would if you held the futures contract on the day it expired.

Practical Points for Trading CFD’s & Spread-Betting

  • Some Spread-Betting commodities trade on different exchanges in different countries. It is important to know what underlying contract the Spread-Betting company is basing their price on. Is it UK-based or US-based, and in which currency is it?
  • What bet size limit is the company setting?
  • Many commodity markets have different trading times, so some markets may not have adjusted to the trading that happened before that market opens.
    Use historical charting and as much technical analysis, to properly understand how the market works.
  • Be aware of key economic events, releases and announcements.
  • Commodity prices often tend to remain steady for long periods, and then swing suddenly.

Crude Oil Futures & Options

  • A futures contract is simply an agreement to buy or sell a quantity of oil at a specified date for a specified price.
  • These are standardized instruments for WTI and Brent that trade on the NYMEX.
  • The standard contract is for 1,000 barrels of oil, so a $1 movement in price is equal to $1,000.
  • Most oil futures contracts require a 10% to 20% margin for retail traders, which is rather high given the cost of 1,000 barrels of oil, although margins can change depending on volatility
  • Futures contracts are settled by physical delivery of the crude oil, which is something most traders don’t want to deal with, so it’s important to keep track of delivery and expiration dates and either roll the position over another month or close it entirely before the contract expires.
  • Trading oil futures are typically for professional traders due to the high cost and complexity involved.
  • With Oil options, a trader essentially pays a premium for the right (not the obligation) to buy or sell a defined amount of oil at a specified price for a specified period of time.
  • Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange (NYMEX), one of the largest derivative product markets in the world
  • Options in the oil market are more expensive due to the high perceived volatility of commodities prices.

Sunil Mangwani

Director and Chief Technical Analyst