Oil trading guide: How to trade crude oil CFDs
Have you ever seen the price of oil fluctuating and wondered how you could take part in the excitement? How does one even go about trading in global markets like crude oil?
For over 100 years, technologies have made the shift from coal to crude oil as their major energy source, and the commodity is used in a variety of products, including gasoline, plastics, medicines and more. Consequently, it is highly valued, and the world watches when prices change.
For traders, the volatility of oil creates many trading opportunities. It can also be used to diversify portfolios, hedge investments in other assets, and take a stake on geopolitical issues.
The good news is that trading oil is more accessible than ever, being available 24 hours a day, 5 days a week, entirely online.
So how can you get started trading oil?
In this article we review how and why oil prices move, which factors impact oil prices, how traders can trade oil and the strategies for trading oil charts.
What Is Crude Oil?
Crude oil is unrefined petroleum and fossil fuel. It is composed of hydrocarbon deposits and other organic materials, and can be refined to produce usable products such as gasoline, diesel, petrochemicals (such as plastics), fertilisers, and even medicines.
Oil is a basic and critical component in the global economy, and, according to the International Energy Agency (IEA), the total global consumption of oil is about 93 million barrels per day. Unsurprisingly, this commodity has a large impact on our daily lives, and, therefore, 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.
What Is WTI Crude Oil?
Also referred to as US Crude, WTI 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 which 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.
What Is Brent Crude 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.
It is mostly extracted from the North Sea and refined in Northwest Europe. Brent is a primary oil type in Europe and North Africa.
What Is the OPEC Basket?
After WTI and Brent Crude oil, OPEC (Organisation of Petroleum-Exporting Countries) oil is another major factor in the global market.
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 popular instruments for trading, there are five 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.
- Geopolitical difference: Oil prices are often influenced by political activity, which can mean the political situation in the areas where oil is extracted can influence prices and oil trading activity. Today, this is more relevant for OPEC oil than Brent or WTI.
- Composition and content: Oil composition also influences the price of WTI and Brent, mainly API (American Petroleum Institute) gravity, which is a measure of how heavy the oil is compared with water, and sulfur content. WTI's sulfur content is 0.24%, versus Brent's 0.37%. Lower sulfur creates a sweeter, easier-to-refine oil.
- 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), while many CFD brokers will offer the option to trade both via the same broker and platform.
- Prices: Theoretically, WTI should trade at a premium to Brent crude, however, this isn't always the case. The reason for this is because there are a range of factors that influence the price of oil, not just the quality of the oil itself. One is supply and demand, for example, when supply increased during the Shale Revolution in the early 2000s, the price of oil went down.
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What Affects the Price of Oil?
The price movement of oil is important - for traders, investors, and global economies. When oil becomes more expensive, it raises costs for consumers directly (oil at the gas station) and indirectly (products made with oil or the fuel used by companies to produce). Ultimately, cheaper oil indicates lower costs for consumers.
Here is the long-term impact:
- Higher oil prices tend to make products more expensive, which in turn undermines economic growth, as it creates potential for inflation and rises in interest rates.
- Lower oil prices tend to make products more affordable, which in turn stimulates economic growth, as it reduces the potential for inflation and interest rate hikes.
- Very low oil prices could lower the supply, as producers may cut their current production or suspend new oil projects.
Oil prices are frequently changing - day by day, minute by minute. The prices are influenced by a wide range of factors.
Here are the main ones to consider:
- Increase or decrease in supply by the oil producers
- Increase or decrease in demand by the oil users and importers
- Subsidies for oil companies or other energy companies
- International politics (agreements made between countries)
- Internal politics of an oil producer
- Competition from other energy sources
- Geopolitical tensions and insecurity (tends to increase prices)
- Usage of oil and its fundamental outlook
You might be wondering how does supply and demand impact price? In general, higher supply and lower demand reduces prices, whereas, lower supply and higher demand increases prices. That being said, there are two main factors that impact supply and demand. Let's review them.
Oil Supply: Oil Production Levels
Oil is a resource that is not located in every country, and hence the production of oil is concentrated. Oil is produced in 100 countries, which is about half of the world. Five of those countries generate 49.6% of the world's total crude oil production. This gives these oil producing countries and oil associations (such as OPEC) more power to control their supply and impact price.
They can decrease their oil production to stop prices from falling or to help increase them. They can increase their oil production if they believe the price is good (i.e. expensive enough) to sell and make a profit.
Oil Demand: The Health of the Global Economy
Demand for oil grows when the global economy is performing well, because consumers are buying more products, companies are shipping and transporting more goods (due to higher demand), companies are investing more (to create enough capacity), and consumers are travelling more for business and leisure. A weakening global economy has the opposite effect, and decreases demand for oil.
How Geopolitics Affects the Price of Oil
With just five countries producing nearly half the world's total crude oil, tension in one of these nations can cause significant issues with supply. For instance, a war or conflict in an oil-producing region could threaten inventories, production or refinement facilities, which could then cause a spike in the oil price.
As a trader, this means it is a good idea to keep an eye on the geopolitical climate surrounding the globe's main oil producing countries.
What Are 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.
The volatility (large price movements) in oil prices is probably the most well-known advantage of trading WTI and Brent crude oil. The oil price tends to move up and down with substantial swings (as seen on the chart below). The price movement offers the potential for traders to capitalise on these movements through intra-day trading, intra-week trading or swing trading.
Depicted: Admiral Markets MT4 with MT4SE Add-on WTI CFD daily chart - date range: 12 June 2019 - 9 June 2020 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
Many traders and investors struggle with having all of their eggs in one basket. In many Western countries, like the US, the UK and Australia, people's wealth is tied up in property, while in other countries, assets like shares account for a large portion of personal wealth.
The danger of this is that if a single market goes down, an investor's entire portfolio can be wiped out. Diversifying your portfolio by investing in and trading a range of markets can help reduce that risk.
Investing in commodities like crude oil is one way traders can diversify their portfolios and manage their risks.
3) Trade the Fundamentals
Many markets are intimidating to new traders because they seem to rely on technical signals. Crude oil, however, is heavily influenced by fundamental events, like the aforementioned geopolitical tensions. This means that, if you regularly follow the news, you may be able to find interesting trading opportunities.
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How To Trade and Invest In Crude Oil
Oil is a very interesting market, with a number of different ways you can trade and invest. These include purchasing crude oil, purchasing oil stocks, trading oil futures, investing in oil ETFs and trading oil CFDs.
If you're ready to get started, did you know that you can open a free demo account online and start trading today?
Here are the first three steps to get you started with online oil trading:
- Sign up for a demo trading account
- Download and install the MetaTrader 5 trading platform
- Sign in to the platform using your demo account details
- Make your first trade!
You can see the process for making your first trade in the video below:
Purchase Crude Oil Directly
You would assume that the most straightforward way to invest in crude oil would be to purchase a barrel, and then sell it at a higher price once the price of crude oil increases.
In reality, it's quite difficult for a retail trader or investor to invest in a physical barrel of oil. Unlike some other commodities, like gold and silver, oil is difficult to store, highly toxic and requires significant insurance if you do manage to get your hands on a barrel.
The good news is that there are a range of other methods for investing in and trading oil, which are far more practical.
Invest In Oil Stocks
The first option for investing in oil and, ideally, profiting when the price goes up, is to invest in the stocks of companies involved in oil exploration, production and refinement. These companies include global behemoths like BP, Royal Dutch Shell, Exxon Mobil and Total SA.
The challenge with this approach is that, because you aren't investing directly in oil itself, the share price of the companies you invest in may not always reflect changes in the oil price. This is simply because there are a range of other factors that go into valuing a company beyond the price of the end product, including dividends, management changes and regulation that may impact a business.
Trade Oil Futures
The next option is trading oil futures. This is a common option for trading both WTI and Brent crude oil.
A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. From a trading perspective, a trader has little interest in receiving the asset itself (usually 1,000 barrels of oil), but is simply trading the contract itself for a profit.
Let's say, for example, that a futures contract for oil is trading at $55 a barrel. If a trader believes that the price of oil will rise before the expiration of the contract, they could buy the contract now with the expectation that they will be able to close the contract at a profit.
If the price of oil increases to $58 by the time the contract expires or the trader chooses to close it, they would have then made $3 in profit per barrel, or $3,000 in total. If the price fell to $54, however, they would have lost $1,000.
Note that when trading oil futures, traders don't need to invest the full value of the contract ($55 x 1,000 barrels of oil). Instead, they need to make an initial margin payment, which is usually a few thousand dollars.
Invest In Oil ETFs
The next option for trading oil is investing in oil or commodity ETFs (exchange-traded funds). An ETF is an asset that is a bundle of other assets (such as stocks) that an investor can choose to invest in or trade. The main benefit of this is that it gives the investor the opportunity to invest in or trade a larger market, rather than having to pick individual instruments.
For instance, if an investor wanted to invest in US tech stocks, but didn't want to research individual stocks to add to their portfolio, they could search for an ETF that represents the US tech stock market, where the work has already been done for them.
There are a range of commodity ETFs available, including crude oil ETFs. These may include the stocks of oil companies as well as crude oil futures.
Like investing in other assets, such as shares, a traditional investment in an ETF is one where you invest at one price, and then close your investment once the value of the ETF increases, making a profit on the difference. However, it's also possible to trade ETFs via a derivative called a CFD, which allows you to trade in both directions (so there's the potential to profit whether the market goes up or down).
Trading Oil CFDs
The final option for trading crude oil is trading via CFDs. A CFD (Contract For Difference) is a tool that allows you to trade price changes in crude oil, but without the need to handle physical contracts or invest in the physical asset.
Instead, you can start trading by:
- Signing up for an account with a CFD broker
- Downloading and installing their trading platform
- Depositing funds into your account (only for live accounts - for demo trading, you can use virtual money)
- Opening and closing trades from the trading platform
You can see the full process for opening a demo account for trading crude oil CFDs in this video:
Some of the benefits of trading oil CFDs include:
- The option to trade the oil markets without investing in physical barrels of oil
- The ability to trade long (buy) or short (sell), which means you can potentially profit in both rising and falling markets
- The ability to make short-term trades, with trades executed in less than a second
- The ability to get more bang for your buck - CFDs are leveraged profits, which means you can access a larger portion of the market than what you deposit (so if a broker offers 1:10 leverage, for every $1 you invest, you can trade $10 worth of crude oil)
- The option to trade a wide range of markets from a single platform - professional brokers like Admiral Markets offer CFDs on thousands of financial markets, including currencies, shares, commodities, cryptocurrencies and more
- The option to trade smaller contract sizes, which means lower risk (e.g. a standard futures contract is 1,000 barrels of oil, while 1 lot (the standard CFD contract) is 100 barrels)
- The ability to trade 24 hours a day, 5 days a week, entirely online
So how does trading oil CFDs actually work? Here's a short example to illustrate the process.
CFD Trading Example
To get a sense for how oil CFD trading works, and how to calculate your potential profit or loss, you need to understand:
- The size of the trade
- The difference between the opening and closing price of the trade
- Any trading costs or fees
When it comes to the size of the trade, CFD trades are measured in 'lots', which is the size of a standard contract in the underlying asset. In the case of both WTI and Brent crude oil, one lot is 100 barrels. This means that if WTI is priced at $55 a barrel, one lot is worth $5,500.
If you thought the price of WTI was going to increase, you would open a buy trade, also known as a long trade. Conversely, if you thought the price was going to go down, you would open a sell trade, also known as a short trade.
Let's say you open a buy trade for WTI at the above price. The price of WTI then increases to $58 a barrel and you subsequently decide to close the trade at this price. The difference between the opening price of your trade and the closing price is $3 per barrel. If we multiply that by the size of the trade (100 barrels), the total profit is $300.
However, it's also important to keep in mind trading costs. The costs charged by CFD brokers fall into three categories:
The spread is the difference between the 'buy' and the 'sell' price of an asset. The buy price is always slightly higher than the sell price, which means that if you were to open a long trade and sell it immediately, you would actually make a loss, since you are selling for a lower price than you originally paid.
The difference is small (at the time of writing, the sell price for WTI in Admiral Markets' MetaTrader 5 is $14.37, while the buy price is $14.40), but this can add up if you are making large trades (e.g. several lots), or a large number of trades.
This spread is one of the fees charged by the broker, and before a trade becomes profitable, an asset's price needs to cross the spread. This is one reason why it's important to look at how competitive a broker's spreads are, as this is a major cost of trading.
Some brokers may charge a commission in addition to or instead of the spread. This is either a percentage or dollar amount taken from the trade, and there is usually a minimum commission that will be charged.
The final charge is the swap, which is an interest rate adjustment that is charged for holding long positions overnight. Note that for short positions, though, you might get paid interest.
If we assume the only cost your broker charges is a spread of $0.03, your net profit for the example above would be $297 [$300 gross profit - ($0.03 x 100 barrels)].
Ready to see this in action? One of the first steps you'll need to take to start trading oil CFDs is downloading a trading platform. The good news is that you can get the world's most popular trading platform - MetaTrader 5, 100% free with Admiral Markets.
MetaTrader 5 gives traders access to superior charting capabilities, free real-time market data, the best trading widgets available, and much more. To download MetaTrader 5 now, click the banner below and receive it for free!
Trading CFDs vs Futures
Since CFDs and futures are some of the most common ways to trade crude oil, traders often want to compare the two to see which is the best match for them.
There are a number of differences between the two products, with the main ones summarised in this table:
Expiry dates (monthly, quarterly)
Generally no expiry dates
Trade via an exchange (CBOT, CME, NYMEX)
Trade via a counterparty (your broker)
No ownership of product
No ownership of product
Can trade long and short
Can trade long and short
Tradable on margin
Tradable on margin
Less markets available than CFDs
Can trade over 3,000+ markets
For a more detailed breakdown, we've written an in-depth guide comparing CFDs and futures trading here.
Strategies For Trading Oil
After finding a broker that will enable you to engage in online oil trading, it is best to think about how to trade oil from a strategic perspective. It is critical to implement proper risk management when trading, but it is also valuable to apply specific oil trading strategies. Most trading methods can be split into different styles and time frames.
Here is a summary of the main methods for trading CFDs on oil, commodities, and other financial instruments:
- Fundamental analysis: reading, analysing and using data, news, and statements to make assessments about future supply and demand
- Technical analysis: this technique analyses price charts via candlesticks (or bars) and indicators to pinpoint trade setups that offer higher probability and a positive expected equity curve in the long-term
- Wave analysis: this method analyses price patterns on the chart to understand the context, market structure, and whether there are any trading opportunities
- Long-term traders use higher time frames such as weekly or daily charts.
- Swing traders use middle time frames such as 4 hour and daily charts.
- Intra-week traders use mid-low charts like 1 hour and 4 hour charts.
- Intra-day traders use lower time frames such as 15 and 60 minute charts.
- Scalpers use very low charts like 1 and 5 minute charts.
Different Time-Frame Combinations For Trading Oil
Although traders can combine all time frames and styles for a long list of combinations, a couple of them that are more common. Let's review the usual methods:
- Fundamental and long-term: when traders trade WTI using fundamental analysis, they can use long-term forecasts to setup a long-term trade on higher time frames - if it's available. Fundamental changes are slower, so there will be less trade setups with this style, but it also requires less time.
- Fundamental and short-term: when traders use data releases and news events for trading purposes, they usually focus on short and quick trade setups, which are done on lower time frames. These types of traders will use specific tools which provide economic announcements, forecasts, predictions and more. Admiral Markets provides a 'Forex Calendar' which provides this type of information.
- Wave analysis and medium & long-term: wave patterns are most useful for trading on 1 hour charts or higher. When you start using this type of analysis, it might be more effective to initially focus on the 4 hour charts and higher. The reason is that interpreting wave patterns takes experience, and it is easier to understand and interpret the dynamics of a higher time frame chart, in comparison with a fast moving one such as a 15 minute graph.
- Technical analysis and medium-term: technical analysis can be used for long-term trading and higher time frame charts, but is more often used for quick entries and exits. Traders can also use technical tools to create a more robust trading plan. Tools often include trend lines, moving averages, Fibonacci, and oscillators.
- Technical analysis and short-term: scalpers are more inclined to use trading indicators that make calculations automatically. They tend to use indicators such as the Parabolic, Keltner Channel, and Pivot Points, rather than manual tools such as trend lines and Fibonacci, because the price moves quickly on lower time frames, and decisions need to be made equally as fast.
- Combination of all three: some traders do not want to limit themselves and like to combine all three methods in a grand approach. Although there is some benefit in traders picking up different views, there is also the risk that they get stuck in "paralysis of analysis" and find themselves being unable to make a decision.
Oil Trading Plans and Trading Systems
As you can see, these elements can be combined to form trading strategies. Trading systems usually include a list of key components such as:
- The form of analysis
- Time frames
- Risk management approach
- Entry methods
- Filters (reasons not to enter)
- Trade management (including market exit and trail stop loss)
- Exit methods (including stop loss and potential targets)
- Feedback and evaluations
Although this might seem like a long list, it is worthwhile to carefully consider all aspects before trading, as it helps traders build a more consistent approach for the long-term.
Oil Trading Strategy Example
Here is an example of a discretionary trading approach using technical analysis on a WTI CFD 4-hour chart. Keep in mind that this is just a simple example of how traders could combine different tools and indicators to form trading decisions. This trading method has not been tested in real trading, and traders should only use it for example purposes. Let's take a look at this example strategy which is based on single time frame analysis (4 hour chart) using the MT5 platform, and the MetaTrader Supreme Edition plugin.
Haven't downloaded them yet? Get the platforms here:
Add the following tools to your MT4 or MT5 platform:
- 100 ema (moving average) close
- Keltner channel from the MetaTrader Supreme Edition plugin
- Fractal indicator
Depicted: Admiral Markets MT4 with MT4SE Add-on WTI CFD - date range: 14 May 2020 - 12 June 2020 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
Here is the sequence of steps:
- Analysis: trade with the trend by using the moving average:
- Longs above the 100 ema close.
- Shorts below the 100 ema close.
- Entry method: breakout.
- Breakout with a candlestick close above the Keltner channel resistance for long setups.
- Breakout with a candlestick close below Keltner channel support for short setups.
- Stop loss:
- Traders can use stop loss above or below the closest fractal, the 2nd candle low or high, or the nearest closed candle low or high.
- New setups are available after the price retraces back into the Keltner channel.
- Trade management: use a trailing stop loss and move to break even once the trade has reached at least a 1 -to- 1 reward to risk ratio.
- Exit method: aim at a recent top or bottom (using the same rule in filter). Or aim at weekly Pivot Points.
Depicted: Admiral Markets MT4 with MT4SE Add-on WTI CFD - date range: 28 April 2020 - 27 May 2020 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
Depicted: Admiral Markets MT4 with MT4SE Add-on WTI CFD weekly chart - date range: 21 June 2015 - 12 June 2020 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The most difficult part is perhaps the idea for filtering out setups, which tries to avoid setups that are too close to recent support or resistance.
Here is how traders can do it:
- Use long-term moving averages:
- Do not enter short setups if the price is above a long-term moving average.
- Do not enter long setups if the price is above a short-term moving average.
- Use control + Y to add horizontal levels. Check the tops and bottoms of the last 2 time zones and place the horizontal trend lines there.
- Make sure that the space between entry and top or bottom (reward potential) is not smaller than the stop loss size, which is entry versus stop loss placement (risk).
Depicted: Admiral Markets MT4 with MTSE Add-on WTI CFD - date range: 31 March 2020 - 30 April 2020 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
Once again, this is not a complete trading system, but just a combination of tools and indicators that demonstrate how traders could build a trading system. Keep in mind that all of these ideas should be tested on a demo account first.
The Best Platform For Trading Oil
Whether you want to trade WTI, Brent crude oil or thousands of other markets, the best trading platform is arguably MetaTrader 5 with the MetaTrader the MT5 Supreme Edition plugin.
The MetaTrader platform offers a charting platform that is easy to use and navigate, along with extra features like one-click trading, real-time trade monitoring and live market updates. Traders can view WTI and Brent crude oil, and a wide range of other financial instruments, including Forex, CFDs, CFDs on commodities, and stock indices.
The MetaTrader Supreme Edition plugin from Admiral Markets offers a long list of extra indicators and tools that are not a standard part of the usual MetaTrader package. The additional features include, but are not limited to, the sentiment trader, the mini terminal, the trade terminal, the tick chart trader, the trading simulator, mini charts perfect for multiple time frame analysis, and an extra indicator package including Pivot Points and the Keltner Channel.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.