How to Trade Commodities
Crude oil and natural gas are the most popular commodities. They generate huge trading volumes every moment, providing online traders with numerous trading opportunities. Whether it is US crude oil (WTI), Brent crude oil (BRENT) or natural gas (NATGAS), energy commodities are quoted in US dollars.
When you trade energy CFDs, the exchange rate against the US dollar is a key factor to keep in mind. Our commodities offer both a “buy” and an “ask” price. The difference between the buy price and the ask price is called the “spread”.
Assume that you believe that the price of WTI crude oil will rise, so you buy 1 lot of WTI at $54.17. This means that when the market moves in the direction you expect, your profit will be $1 for every 0.01 change in price.
Basic knowledge of crude oil
Crude oil has applications in manufacturing, transportation, and energy production, and its variable supply and limited storage have a huge impact on the global economy. Crude oil is popular with traders, and its supply and demand are constantly changing, so there are constant price fluctuations and high liquidity.
You don’t need to deal in large quantities of crude oil to trade the oil market. Because most oil and gas trading is done through futures.
Types of Crude Oil Trading
Crude oil is traded on exchanges, just like stocks. But unlike stocks, it is traded in the form of crude oil benchmarks. Crude oil is not produced in exactly the same form around the world, and crude oil benchmarks allow traders to quickly identify the quality and location of the oil they are buying and selling. The spot price of crude oil represents the cost of buying or selling crude oil and delivering it immediately or on the spot (rather than at a set date in the future). Therefore, futures prices reflect what the market believes the oil will be worth when it expires in the future, while spot prices reflect the value of crude oil now.
West Texas Intermediate (WTI)
This is a type of crude oil produced in the United States, also known as Texas Light Sweet Crude Oil. The so-called “light” means that it is less dense than most OPEC crude oils, and the “sweet” refers to its lower sulfur content.
Brent Crude Oil (BRENT)
Brent is a type of crude oil produced in the North Sea. Brent is also described as “light, sweet crude oil,” just like WTI.
Factors Dominating Crude Oil Prices
Crude oil is one of the most traded commodities in the world, and new changes are happening in the crude oil market every day.
Extraction and Refining
The process of extracting and refining crude oil is expensive. Since oil reserves are located deep underground, it takes considerable effort to extract crude oil from the ground. Any technological advancement or setbacks in the extraction process have a direct impact on the price of crude oil.
Consumption and demand
The largest consumer of crude oil is the United States, followed by Japan, China, and European industrial countries such as Germany and the United Kingdom. The industrial and economic sectors of these countries have a large demand for crude oil, so their demand affects the global crude oil price.
Availability and supply
Regardless of supply changes, the availability of crude oil can be affected by political and economic factors. Rising inflation, unemployment, and poverty rates can lead to lower consumption levels, making some products unaffordable for those affected. Political unrest and insurgency can also lead to a reduction in crude oil imports and the smuggling of imported commodities.
Natural disasters and accidents
Natural disasters such as earthquakes and hurricanes are unpredictable events that can hinder and delay the rate of crude oil production due to damage to drilling sites and refineries. Fires and mechanical failures can also cause delays in production as they take time to recover. Delays caused by these environmental factors can lead to a reduction in crude oil supply, which can cause prices to rise.