- Crude oil is a liquid fuel extracted from underground drilling
- It can be refined for use in heating and electricity generation, transportation, and for sale to consumers in the form of lubricating oils, tar, and more
- Classification of crude oil can depend on viscosity or level of sulphate content
- Oil prices are moved by supply, demand, and market sentiment
- Traders can participate in crude oil exchanges through futures, spot, and options oil trading
What is crude oil?
Crude oil is a liquid fuel that is extracted through drilling underground. It can be refined and further processed for use in heating and electricity generation and transportation needs as petroleum products. It can also be used to make heavier products such as paraffin wax, various lubricating oils, tar, and asphalt for sale to consumers. In trading, it is a commodity.
How is crude oil classified?
There are different types of crude oil available for trading, and they can be classified in two ways. They can be classified as ‘light’ or ‘heavy’ depending on the viscosity, or the thickness, of the fluid:
- Very light oils. These include jet fuel, gasoline, and kerosene. They are the least expensive to produce.
- Light oils. These include diesel fuel oils.
- Medium oils. The most common type of crude oil, these have a blend of light and heavy oils.
- Heavy fuel oils. These include marine oils used for commercial vessels.
They can also be classified as ‘sweet’ or ‘sour’, depending on the level of their sulphur content:
- Sweet oils. These are crude oils with low sulphur content.
- Sour oils. These are crude oils with high sulphur content.
High sulphur content is typically undesirable in the processing of crude oils, and therefore, sweet oils are preferred and more valuable than sour oils.
Why trade crude oil?
Crude oil is one of the most liquid commodities in the global market, and the volume of crude oil traded is more than that of all the various metals markets combined. It is a valuable asset as it is a source of fuel with many uses on small and large scales, and it is available in a limited amount. Crude oil is also a lucrative trading option as its market prices are in constant fluctuation, allowing for the opportunity for traders to profit.
What moves oil prices?
Price fluctuations in oil are caused mainly by supply, demand, and market sentiment. Firstly, oil is a precious and limited resource, controlled and produced by a small number of countries such as the United States, Russia, and Saudi Arabia. Settling supply and demand negotiations can result in international political disputes and heavily affect oil prices from country to country. Warfare or civil unrest within these leading production countries can also impact prices, as mining activities and oil output rates are deceased during unstable times. Additionally, the mining of oil is also one of the main contributors to global warming. As the world becomes more eco-conscious and moves towards investing in sustainable energy resources, wind and solar energy developments play a part in moving oil prices.
Ways to trade crude oil
Crude oil, like other commodities, can be bought and sold in both short- and long-term investments. This can be done in the form of crude oil futures, spot, and options trading. Unless traders are part of large oil businesses or companies, crude oil trading does not involve the physical exchange of oil barrels. More often than not, retail trading is based on the underlying price of the commodity and profits are made from market fluctuations observed on exchanges.
Crude oil futures trading
Buying and selling crude oil futures is the first common way to trade oil. A futures contract is an agreement between two parties to buy or sell a set number of barrels of oil at a specified time in the future. The price at which these barrels will be bought or sold will be based on their underlying price when signing the contract. Futures agreements are drafted on the prediction that crude oil prices will rise or fall in the future to allow the trader to profit.
Crude oil spot trading
Traders can also participate in crude oil spot trading. This is when oil is traded ‘on the spot’, meaning trading happens immediately instead of a predetermined date in the future. Trading depends on the oil spot price, which is the current value of the oil. While only crude oil industrialists and institutional traders can intervene directly in the spot market, retail traders can invest in it through financial intermediaries such as brokers. Many prefer spot trading to invest in the short term as oil prices are volatile and can fluctuate heavily.
Spot markets for trading oil
There are two major spot markets for trading crude oil—London and New York. Brent Crude, extracted from the oil fields between the Scottish Shetland Islands and Norway, is the most available in the London market. The most available crude oil in the New York market is the West Texas Intermediate (WTI), which is extracted and produced exclusively in the US. Brent Crude and WTI dominate the international oil exchange, and their market prices are used as the benchmark for other oil spot prices in their respective markets. Despite being most traded in their origin markets, it is possible to trade WTI in Europe and Brent Crude in the US.
Crude oil options trading
Finally, traders can participate in the market through crude oil options trading, in which a trader pays a premium to buy an options contract. Oil options contracts function similarly to those of oil futures in that they both have a set date the contract expires. However, options traders are not obligated to buy or sell at the oil spot price upon the contract’s expiry. Instead, they are given an option if they want to take action. If they predict that market conditions are unfavourable and do not perform any action, they only lose the premium spent on the contract.
Call and put options
There are two types of options: calls and puts, and they can be bought or sold. A trader buys a call option when he predicts oil prices will rise and buys a put option when he predicts oil prices will fall. Inversely, he sells a call option when he predicts oil prices will fall and buys a put option when he predicts they will rise. Some traders may prefer options contracts as it gives them some time to observe market price fluctuations before deciding to make a trade or not. The bottom line Crude oil is one of the most important and sought-after resources in today’s world. Always in demand and limited in supply, its market prices fluctuate constantly, creating opportunities for institutional and retail traders to make a profit. Here at Rakuten Securities Australia, our crude oil trading options include UK and US Crude Oil and UK and US Crude Oil +$100. They are available with leverage on our MetaTrader 4 platform. All trading activities contain risk, so traders can feel free to try a free forex demo account to practise before creating a live account.