Buying Crude Oil Put Options to Profit from a Fall in Crude Oil Prices

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Falling oil prices: Who are the winners and losers?

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Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.

From 2020 until mid-2020, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

The reasons for this change are twofold – weak demand in many countries due to insipid economic growth, coupled with surging US production.

Added to this is the fact that the oil cartel Opec is determined not to cut production as a way to prop up prices.

So who are some of the winners and losers?

Russia: Propping up the rouble

Russia is one of the world’s largest oil producers, and its dramatic interest rate hike to 17% in support of its troubled rouble underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes.

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Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia’s economy would shrink by at least 0.7% in 2020 if oil prices do not recover.

Despite this, Russia has confirmed it will not cut production to shore up oil prices.

“If we cut, the importer countries will increase their production and this will mean a loss of our niche market,” said Energy Minister Alexander Novak.

Falling oil prices, coupled with western sanctions over Russia’s support for separatists in eastern Ukraine have hit the country hard.

The government has cut its growth forecast for 2020, predicting that the economy will sink into recession.

Former finance minister, Alexei Kudrin, said the currency’s fall was not just a reaction to lower oil prices and western sanctions, “but also [a show of] distrust to the economic policies of the government”.

Given the pressures facing Moscow now, some economists expect further measures to shore up the currency.

“We think capital controls as a policy measure cannot be off the table now,” said Luis Costa, a senior analyst at Citi.

While President Putin is not using the word “crisis”, Prime Minister Dmitry Medvedev has been more forthright on Russia’s economic problems.

“Frankly, we, strictly speaking, have not fully recovered from the crisis of 2008,” he said in a recent interview.

Because of the twin impact of falling oil prices and sanctions, he said the government had had to cut spending. “We had to abandon a number of programmes and make certain sacrifices.”

Russia’s interest rate rise may also bring its own problems, as high rates can choke economic growth by making it harder for businesses to borrow and spend.

Venezuela: No subsidy cuts

Venezuela is one of the world’s largest oil exporters, but thanks to economic mismanagement it was already finding it difficult to pay its way even before the oil price started falling.

Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices.

The country already has some of the world’s cheapest petrol prices – fuel subsidies cost Caracas about $12.5bn a year – but President Maduro has ruled out subsidy cuts and higher petrol prices.

“I’ve considered as head of state, that the moment has not arrived,” he said. “There’s no rush, we’re not going to throw more gasoline on the fire that already exists with speculation and induced inflation.”

The government’s caution is understandable. A petrol price rise in 1989 saw widespread riots that left hundreds dead.

Saudi Arabia: Price versus market share

Saudi Arabia, the world’s largest oil exporter and Opec’s most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this.

There could be two reasons – to try to instil some discipline among fellow Opec oil producers, and perhaps to put the US’s burgeoning shale oil and gas industry under pressure.

Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn – so can withstand lower prices for some time.

“In terms of production and pricing of oil by Middle East producers, they are beginning to recognise the challenge of US production,” says Robin Mills, Manaar Energy’s head of consulting.

If a period of lower prices were to force some higher cost producers to shut down, then Riyadh might hope to pick up market share in the longer run.

However, there is also recent history behind Riyadh’s unwillingness to cut production. In the 1980s the country did cut production significantly in a bid to boost prices, but it had little effect and it also badly affected the Saudi economy.

Opec: Not all are equal

Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and Kuwait have also amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary.

Other Opec members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre.

They have combined foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.

Nigeria, which is Africa’s biggest oil producer, has seen growth in the rest of its economy but despite this it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country’s exports.

The war in Syria and Iraq has also seen Isis, or Islamic State, capturing oil wells. It is estimated it is making about $3m a day through black market sales – and undercutting market prices by selling at a significant discount – around $30-60 a barrel.

United States: Fracking boom

“The growth of oil production in North America, particularly in the US, has been staggering,” says Columbia University’s Jason Bordoff.

Speaking to BBC World Service’s World Business Report, he said that US oil production levels were at their highest in almost 30 years.

It has been this growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices.

“Shale has essentially severed the linkage between geopolitical turmoil in the Middle East, and oil price and equities,” says Seth Kleinman, head of energy strategy at Citi.

Even though many US shale oil producers have far higher costs than conventional rivals, many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs.

Europe and Asia: Mixed blessings

With Europe’s flagging economies characterised by low inflation and weak growth, any benefits of lower prices would be welcomed by beleaguered governments.

A 10% fall in oil prices should lead to a 0.1% increase in economic output, say some. In general consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.

China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won’t fully offset the far wider effects of a slowing economy.

Japan imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe’s growth strategy to combat deflation.

India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall by $2.5bn this year – but only if oil prices stay low.

The Basics of Trading Crude Oil Futures

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Crude oil is one of the better commodities on which to trade futures contracts. The market is incredibly active, and it is well known to traders around the world. Oil prices fluctuate on the faintest whisper of news regarding pricing, which makes it a favorite of swing and day traders looking for an edge.

This volatile environment can provide some solid trading opportunities, whether your focus is on day trading futures or you are a longer-term trader. It may also provide great losses if you are on the wrong side of a price movement.

Crude oil is also one of the most actively traded commodities in the world.   The price of crude oil affects the price of many other commodities, including gasoline and natural gas. However, the ripple effect of crude oil prices also impacts the price of stocks, bonds, and currencies around the globe. 

Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector. 

Crude Oil Contract Specs

Trading crude can be confusing when you first get into it, and you should memorize these specifications before you consider beginning to trade. 

  • Ticker symbol: CL
  • Exchange: NYMEX
  • Trading hours: 9:00 a.m.–2:30 p.m. ET
  • Contract size: 1,000 U.S. barrels (42,000 gallons).
  • Contract months: All months (Jan.–Dec.)
  • Price quote: Price per barrel (example: $65.50 per barrel)
  • Tick size: $0.01 per barrel ($10.00 per contract)
  • Last trading day: Third business day prior to the 25th calendar day of the month preceding the delivery month

Traders are also advised to understand the futures market. When you trade a futures contract you have the obligation to either buy or sell—call or put—the commodity by the expiration date at the stated price. If you hold a call, the only way to avoid actually having to take physical delivery of 10,000 barrels of crude oil is to offset the trade before the expiration. Trading futures is not for the novice. 

Crude Oil Fundamentals

Despite using it every day, not many people know the differences between crude oil and gasoline. Crude is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel, and many other petrochemicals. The fundamentals are different since it is a raw product. Crude also comes in many different grades. 

Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). “Light Sweet” is the most popular grade of crude oil being traded because it is the easiest to distill into other products. 

Another grade of oil is Brent Blend Crude, which is primarily traded in London and is seeing increased interest. Russia, Saudi Arabia, and the United States are the world’s three largest oil producers as of 2020.   Brent is the most widely used benchmark for determining gasoline prices. 

West Texas Intermediate (WTI) is crude from U.S. wells. The product is light and sweet and ideal for gasoline. It trades under the CL ticker on the Chicago Merchantile Exchange (CME) and the NYMEX

Middle Eastern crude is known as Dubai and Oman oil. It has a higher sulfur content and falls into the category of heavy, sour oil. The Dubai Mercantile Exchange offers futures for this crude.

When crude oil is refined or processed, it takes about three barrels of oil to produce two barrels of unleaded gas and one barrel of heating oil.   This helps to put into perspective the production needs of crude, and why production and supply levels are watched so closely.

Crude Oil Reports

The main reports for crude oil are found in the U.S. Energy Information Administration (EIA) Weekly Energy Stocks report. This report is released every Wednesday around 1:00 p.m. ET, with traders eagerly awaiting its arrival. 

Tips on Trading Crude Oil Futures

Oil futures are notorious for their volatility. Here are some quick tips that you should look for when tracking price movement and making trades:

  • The price of unleaded gas and heating oil can influence the price of crude oil.
  • Demand is generally highest during the summer and winter months. Very hot summer or very active driving season (for summer vacations) can increase the demand for crude oil and cause prices to move higher.
  • An extremely cold winter causes a higher demand for heating oil, which is made from crude oil. This usually causes prices to move higher. Watch the weather in the Northeast, since it’s the part of the country that uses heating oil more than any other.
  • Watch for oil production cuts or increases from OPEC (Organization of Petroleum Exporting Countries), which determines global supply and demand for crude. 

Volatile Market for Crude Oil Futures

Crude oil often trades in a volatile environment. Major news events can happen overnight, causing oil prices to swing unpredictably and widely. The same thing can happen throughout the day since crude futures trade around the clock. Whether it’s an economic report or tensions in the Middle East, a tight supply situation can exacerbate price movement. 

Supply and demand obviously dictate how the price will move, but this market moves on emotion as well, especially with retail investors who day trade.

If tensions escalate in the Middle East, there’s no telling the extent of possible supply disruptions, and traders often react swiftly on the news, adjusting their strategy following price fluctuations.

Price Movements for Crude Oil

The reason prices move so swiftly is that traders who have short positions in the market tend to cover their shorts quickly if price creeps up, either eroding their gains or causing losses. In order to do this, they have to place buy orders to cover. This wave of buying is done at the same time speculators are jumping on board to establish or add to long positions. The shorts will cover quickly because the risk is just too great; if a major development arose that disrupted supply, shorts could theoretically lose more money than they invested, resulting in a margin call from their brokerage, one of the most dreaded calls in the world of investors.

The usual tendency is for oil prices to spike on news of turmoil in the Middle East. Then prices calm down and start to move lower unless there’s irrefutable evidence of major supply disruptions. Identifying these waves of buying and selling is very important if you want to avoid getting a haircut in the financial markets.

For the most part, crude oil tends to be a trending market, driven largely by psychological movement. There’s usually a major bias to the upside or downside. Trading from the trending side will certainly help improve your odds of success. Crude oil also tends to get stuck in prolonged ranges after a sizable move. A person who can identify these ranges has plenty of opportunities to buy at the low end and sell at the high end. Some investors trade the ranges until there’s a clear breakout either way.

The value of the U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices.   A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tend to support higher oil prices. However, oil prices moving too high can stifle the economy. Historically, oil prices tend to move opposite the stock market. This trend becomes a concern when oil prices approach the psychological price marker of $100 a barrel.

Day Trading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts very well to pivot points and support and resistance levels. You have to make sure you use stops orders in this market. Stop orders are automatically triggered trades that can help reduce the high risk of a market that can make very swift runs—up or down—at any given time.   Longtime energy trader Mark Fisher wrote an excellent book on day trading oil futures titled The Logical Trader.

There’s no shortage of trading opportunities. Most traders close their position end-of-day (EOD) to ensure they sleep at night, considering overnight volatility.

Many of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the E-mini S&P, you’ll probably like crude oil, too.

Crude oil entered a bear market in June 2020 when the price was just under $108 per barrel on the active month NYMEX crude oil futures contract. By February 2020, the price depreciated to under $30 per barrel. In January 2020, the price was trending around $53.84 per barrel for WTI Crude. As of December 27 2020, the price is on the rise at $61.72 per barrel. 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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Reading time: 28 minutes

Have you ever seen the price of oil fluctuating and wondered how you could take part in the excitement? Is it even possible for the average person on the street to trade global markets like crude oil?

For over 100 years, technologies have made the shift from coal to use 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, as well as to 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 why it 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?

WTI stands for West Texas Intermediate. This is one of the two most popular and well known benchmarks for trading oil on MetaTrader 4 and MetaTrader 5. The second is Brent Crude.

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 and 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.

Brent crude oil 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 oil is another important player on the global oil market. OPEC, or the Organisation of Petroleum-Exporting Countries, is one of the major players in the oil industry.

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:

  1. 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.
  2. 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.
  3. Composition and content: Oil composition also influences the price of WTI and Brent, mainly API gravity and sulfur content. WTI’s sulfur content is 0.24%, versus Brent’s 0.37%, with lower sulfur creating a sweeter, easier-to-refine oil.
  4. 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.
  5. Brent and WTI oil 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, where supply increased during the Shale Revolution in the early 2000s, causing price to go down.

Ready to try trading oil? The good news is that you can try trading risk free with a free demo account! At the same time, though, you still benefit from access to real-time market data and the most sophisticated trading tools, so you can get the most out of your trading.

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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 the costs for consumers directly (oil at the gas station) and indirectly (products made by oil, or 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 interest rate hikes.
  • 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
  • World wide supply of oil
  • 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 (where oil is often used for creating goods), companies are shipping and transporting more goods (due to higher demand), companies are investing more (to create enough capacity), and within the business world, 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;s 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

Oil trading benefit 1: Volatility

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 traders can see 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 MT5 with MT5SE Add-on WTI CFD – 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.

Oil trading benefit 2: Diversification

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.

Oil trading benefit 3: Trade the fundamentals

Many markets are intimidating to new traders because they seem to rely on technical signals. Crude oil, however, is still 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.

If you want to learn more about trading, and trading oil, check out our upcoming free webinars! Every week we cover a range of popular trading topics, including markets, strategies and more, all delivered by three pro traders. Click the banner to sign up now!

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 investing purchasing crude oil, in 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:

  1. Sign up for a demo trading account
  2. Download and install the MetaTrader 5 trading platform
  3. Sign in to the platform using your demo account details
  4. 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, regulation that may impact a business, public perception and more.

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 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, like 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. CFD stands for contract for difference, and it 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 in this video:

Some of the benefits of trading oil via 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, and 0.1 lot is just 10 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 oil trading example

To get a sense for how CFD trading works, and how to calculate your potential profit or loss, you need to understand:

  1. The size of the trade
  2. The difference between the opening and closing price of the trade
  3. 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. (If you thought the price was going to go down, you would open a sell trade, also known as a short trade.)

After you open your trade, the price of WTI increases to $58 a barrel, and you decide to close the trade at this price. The difference between the opening price of your trade and the closing price is $3 ($58 – $53) 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 actually 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 $55.03, while the buy price is $55.06), 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 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 oil CFDs vs. trading oil 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

Tradeable 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 in 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 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 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 MT5 with MT5SE Add-on WTI CFD – 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.

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 MT5 with MT5SE Add-on WTI CFD – 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.

Depicted: Admiral Markets MT5 with MT5SE Add-on WTI CFD – 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 MT5 with MT5SE Add-on WTI CFD – 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.

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. Always 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.

Click the banner below to receive your FREE download!

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

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.

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