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Oil trading-understanding how it works

By Sponsored
20 May 2022   |   2:20 pm
Are you interested in trading oil but don't know how it works? Worry no more and read this article that explains how oil trading works.

Are you interested in trading oil but don’t know how it works? Worry no more and read this article that explains how oil trading works.

Trading oil involves buying and selling different assets based on one of the world’s most widely used commodities. Also, oil trading happens in oil CFDs, including cash and futures. That means that you are not buying a particular asset, but instead, you are speculating on whether the oil price in the open market will rise or fall.

How Oil Trading Works

Also, oil is a finite resource; hence its price can see massive fluctuations due to supply and demand changes. That volatility aspect makes it extremely popular among traders. There are three different ways one can trade oil, and they include;

  • Trading with the oil spot prices represents the cost of buying and selling oil immediately or, in simpler terms, ‘on the spot.’ That means you don’t have to set a date in the future. Spot prices show how much oil is currently worth.
  • Trading with the oil future prices are contracts in which you agree to exchange an amount of oil at a specific cost on a set date. They are traded on exchanges and reflect the demand for different fats. Oil futures are a standard method of buying and selling oil and help you deal with rising and falling prices. Companies use futures exchange for an advantageous oil price and hedge against adverse price movements. However, they are popular among speculative traders, too, as there is no need to take delivery off fat barrels even though you have to fulfill the contract through cash settlement. 
  • Trading via oil options is similar to a futures contract, but there is no obligation to change if you don’t want to. You get the right to buy or sell an amount of oil at a set price with a specified expiry date. However, you won’t be obliged to exercise your option. There are two types of oil options, calls, and puts. You can buy via a call option if you think that the oil price will rise, and if you are willing, you could buy via put. Also, you can sell calls and buy puts if you want to take the opposing positions. Selling options generate income in quiet markets since you receive their value outside of your trade. 

One can also trade oil with brokers on the trading platforms. The broker should be knowledgeable, and the forum should be reliable. Most broker platforms function like crypto exchanges, such as the Oil Profit 

What Moves the Price of Oil?

The supply and demand relationship is what necessarily moves the oil price. When there is a need for oil that outweighs its collection, fat will increase. On the other hand, if the market falls and supplies increase, the oil price will fall. Factors like oil storage, the push for alternative energy sources, and performance of the economy globally, and the influence of OPEC affect the supply and demand of oil. 

Types of Crude Oil

Several crude oil types, but the most common ones are:

  • Brent Crude Oil is a widely popular marker and part of the significant benchmarks for oil in the Middle East, Europe, and Africa. Also, an estimated 60% of the world’s traded oil’s pricing happens off Brent.
  • WTI is the primary type of crude oil consumed in the USA, and it comes from wells in America. Oil fields in the USA are landlocked; hence transporting WTI is quite expensive compared to Brent.

Final Thoughts

Generally, one can now tell what oil trading is and how it works because it has highlighted everything. But what you should note is that oil future contracts are not measured in barrels but rather in thousands of barrels.

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