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Top Crude Oil Trading Tips and Strategies

Top Crude Oil Trading Tips and Strategies

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Crude oil is the main energy source for the global economy, making it a widely traded commodity. It is considered to be one of the most liquid traded commodities due to high trading volumes and ongoing demand which translates into tighter spreads and steadier trends. Crude oil is a natural raw petroleum product that can be refined to many products including diesel, gasoline, wax and petrochemicals. It is commonly known as the black gold. 

Understanding Crude Oil Trading

Oil trading is the process of selling or buying oil in order to profit from price changes. Due to its finite feature, prices of crude oil are highly vulnerable to supply and demand changes. Oil traders always keep an eye on supply and demand imbalances to make the most out of price fluctuations. 

Both technical and fundamental analysis are essential when it comes to the oil market. Historical trends and price movements are no less important than market fundamentals and drivers of both supply and demand. 

West Texas Intermediate (WTI) and Brent crude are the two most common types of crude oil and are used as benchmarks for global oil prices. Traders have a variety of oil investment options that come with different levels of risk and market exposure. Crude oil CFDs are a popular investment choice for traders through which they can speculate on prices without having to own physical oil barrels.

  • Spot Oil Prices: reflect the current price at which oil can be sold or bought for immediate or on the spot transactions. 
  • Oil Futures: are contracts of agreement to buy or sell a set amount of oil at a set price on a set date. Prices of future contracts reflect the expected oil price on the expiry date of the contract. Futures act as a hedging tool against higher prices. 
  • Oil Options: similar to futures, options provide traders with the right to exchange a set amount of oil at a set price on a set date, with no obligation to do so. If a trader expects prices to rise, then a call option is chosen. On the other hand, when prices are expected to fall, a put option is set. 

What affects Crude Oil Prices? 

Crude oil prices are broadly determined by the relationship between supply and demand and are driven by three main forces:

Supply and Demand 

Supply: Production levels are the main price driver when it comes to oil. This explains why the OPEC+ decided to curb supply to support prices. 

Demand: Global demand trends directly influence price movements. The United States, China and Europe dominate the global demand consuming around 45 million crude oil barrels per day. 

Price Speculations and Geopolitical Tensions

Oil prices are based on the future market, meaning that market speculation about potential events and trends could have a direct impact on oil prices. Turbulence in oil-producing countries dramatically increases oil prices as traders worry the crisis will limit oil supply, which may lead to higher demand and price levels. 

Unexpected events can also have a huge impact on prices. In 2020, when economies got stuck in lockdown in the wake of pandemic outbreak oil prices began to fall dramatically. Oil consumption averaged 94.4 mpd in Q1 2020 down 5.6 mbp from the prior year. 

The sharp drop in global demand was even worsened by supply glut. Producers increased output to keep their market share. By April, crude oil crashed into the negative territory for the first time ever. WTI barrel traded at -$37. Shortly after, prices managed to rebound gradually as the global economy reopened and demand began to rise. Meanwhile, production cuts help to restore the balance between supply and demand. 

Recently, the rising political tension between Russia and Ukraine pushed crude oil prices to the highest levels in 8 years.

 Update: Crude oil prices exceeded $100 for the first time since 2008.

The value of the US Dollar 

Since oil is priced by the US dollar, prices are inversely related to the value of the USD. So, when the value of the dollar rises, prices fall, and vice versa. On the other hand, some currencies are impacted directly by oil price changes. Read more on Understanding Currency and Commodity Correlations

Five Reasons to Invest in Oil This Year 

Oil Trading - Five Reasons to Invest in Oil This Year 
  1. Robust global demand: the economic recovery following the pandemic-caused setback results in growing global demand as economies reopens and back to full production capacity. 
  2. Low production capacity: production restrictions among OPEC countries and allies amid rising demand boost oil prices. 
  3. Ongoing geopolitical tensions: the recent geopolitical tensions between Russia and Ukraine fueled the crude oil price rally reaching a high of $97 for the first time since 2014.
  4. Limited sector investments due to Covid-19 concerns: despite the economic expansion seen in most countries, concerns over the emergence of new pandemic variants are still a major headwind to oil investments worldwide. 
  5. Prices are expected to overshoot $100: in light of the above factors, economists are widely expecting oil prices to overshoot this year unless there is a supply increase decided by the top oil producing countries, and specifically the OPEC. 

Read more on  OPEC and How it Influences Oil Prices

Top Crude Oil Trading Tips and Strategies

The frequent volatility in oil prices enables traders to make profits by predicting price direction. Follow the following steps for profitable oil trading: 

Keep an eye on market movers

Global economic performance is a major driver of oil prices. The more prosperous and flourishing the world economy is, the more likely demand will rise supporting prices. Unlike in times of economic contraction and weak demand, when oil tends to underperform. Watch changes in global demand and supply levels as well as oil inventories which rise when the market is oversupplied. 

Follow the trend

Oil futures are ruled by institutional investors, hedgers and professional traders heavily trading crude oil to hedge against adverse price fluctuations. On the other hand, retail traders have less influence on market trends but they enjoy the advantage of following the direction of oil futures to make profits, which amplifies price trends. Investors can also understand market trends by observing hedging strategies of major market participants.

Watch the long-term chart

Reading long term price trends helps traders predict the next directional price movements. Unlike most commodities, crude oil prices are not fully determined by supply and demand. Market sentiment plays a critical role in driving prices. Future contracts tell a trader more about upcoming price direction, while historical trends provide a clearer picture how the black gold reacts to market changes.  

Know what type of crude oil you’re trading 

It’s crucial to know that each type of crude oil has its own performance and price drivers. For example, West Texas Intermediate (WTI) has become cheaper compared to Brent Crude due to advancing oil drilling and fracking. Brent Crude is more vulnerable to geopolitical tensions unlike West Texas Intermediate that is primarily produced in the United States. Despite the fact that prices of both types are aligned most of the time, the gap usually widens in times of political uncertainty, severe changes in production costs and ease of refining.

Analyze the market and follow a strategy 

Just like any other market, trading oil requires focused market analysis. Both technical and fundamental analysis should be applied to identify trading opportunities. Fundamental analysis will help you be informed about production levels, demand trends, economic health and market sentiment. While you can benefit from technical analysis to identify entry and exit points, support and resistance levels and also assessing price momentum. 

To make the best use of oil analysis, you have to implement a trading strategy that fits the oil market fundamentals. There are multiple popular oil trading strategies among traders including: 

  • Swing Trading: involves buying and holding oil for a short period of time ranging from a few minutes to a couple of days. Swing traders profit from short-term price changes due to supply and demand variations. They tend to be focused on technical factors and chart patterns rather than fundamental ones. Usually, this is a trend following strategy where traders buy when the market is trending up and sell when prices are falling. 
  • Spread Trading: this strategy involves buying and selling oil futures in order to profit from the expected price changes between buying and selling contracts. Check more on price spread.
  • Day Trading: this strategy is all about speculating on short-term changes in oil prices. Day traders profit from rising and falling prices. Read more on day trading tips. 

How to Start Oil Trading

  1. Learn about oil market fundamentals. 
  2. Decide how you want to trade oil. Choose between oil CFDs, futures, options or spots. 
  3. Choose a reliable broker. Here are some tips for choosing the best forex broker
  4. Open a forex account and find a trading opportunity. 

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