How to Make a Profit in Crude Oil Trading?

How to Make a Profit in Crude Oil Trading?

2022-11-23 • Updated

There are thousands if not millions of assets in the world, starting from the well-known euro, dollar, gold, bitcoin, and others. But among them, one extremely popular and controversial asset has started several wars, crashed markets, and became a synonym to the word "commodity."

What is commodity trading?

We define a commodity as a basic good used in commerce that is interchangeable with other goods of the same type. People use commodities as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When traded on an exchange, commodities must also meet specified minimum standards, known as a basis grade.

Commodities such as oil and grains may vary drastically in quality. For example, the basis grade for a crude futures contract is according to the oil's specific levels of hydrogen and sulfur.

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In the forex market, you trade contracts on commodities, so you don't need to bother yourself with different expirations date for different futures. Nevertheless, there are several essential things about crude oil trading you should know beforehand.

Learn and understand what moves crude oil

Oil is one of the most popular assets in the world, so numerous factors are affecting its price. Just like in any other asset, the crude oil price is affected by supply and demand. Most crude oil is produced in the US, Saidu Arabia, Russia, Canada, and China. Altogether these five countries are controlling more than 50% of the global crude oil extraction. Weather conditions, demand changes, ecological and geopolitical concerns are all affecting the oil price.

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On the chart, you can see the changes in crude oil production in the US since 1985. When the pandemic started to concern the economy, production fell sharply. The reaction of the price was corresponding. On April 20, 2020, the front-month May 2020 WTI crude contract dropped 306%, or $55.90, for the session, to settle at negative $37.63 a barrel on the New York Mercantile Exchange. This caused billions of losses for traders and created panic among people, as nobody could imagine that the commodity's price may fall that much. It was the first and, for now, the only case in history.

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Unlike most products, oil prices are not determined entirely by supply, demand, and market sentiment toward the physical product. Instead, supply, demand, and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination. Futures contracts are often used as a hedge against price fluctuations. Oil is a volatile asset, and this is the reason for the futures to be so popular. 

There are also seasonal demand swings for crude, clearly exemplified by the well-known "summer driving season." You can see this seasonal price action and the impact of the summer driving season in the chart below.

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The above seasonality chart represents 20 years of price action. As you can see, it's easier to profit from crude oil trading by buying it before summer.

Understand the crowd

Oil traders don't act randomly. Some buy oil because of seasonal demand, while others sell it due to hurricanes that shut down oil sites. Fundamental events have different duration and impacts. Professionals use oil futures as a hedge against market volatility. Retail traders, on the other hand, love big swings in price. Oil can make a move you'll never forget, and a crash in April 2020 proves it. A New covid-19 strain was discovered in South Africa in November 2021. The price of black gold has fallen by more than 13% that day—an unbeatable result if compared with other commodities, especially gold.

How to choose between WTI crude oil and Brent

Due to advancements in oil drilling and fracking, there has been a trend of West Texas Intermediate (WTI) becoming cheaper than Brent Crude oil. Before this, Brent Crude tended to be cheaper than West Texas Crude. However, the American shale revolution and the increased production led oil prices to fall from above $100 to below $50 from 2014 to 2015.

Another factor that can lead to significant differences between Brent Crude and West Texas Intermediate is geopolitical trouble. During times of crisis, the spread blows out as political uncertainty leads to surges in Brent Crude prices. West Texas Intermediate is less affected because it is based in landlocked areas in the United States. As a result, the prices of the two types of oil are aligned most of the time.

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Price differences can reflect the ease of refining, the geography of where the oil is produced, costs of transportation to where the contracts are fulfilled, and political and economic conditions in the regions where the oil is sold. But the increasing price differential in 2011 is often attributed to the bottleneck in the transportation of the product to Cushing, Oklahoma, where WTI oil futures contracts are settled. The gap began to narrow in 2014 when these bottlenecks eased, but it widened again in 2017.

Oil is volatile, and to get the most from the market fluctuations you need to be in touch with fundamental news and technical analysis. To get fresh and relevant information that will help you profit in oil trading, visit the energies section on the FBS site. You can trade oil with FBS via Meta Trader 4 and 5, and FBS Trader application. Brent oil is traded as XBR/USD, and crude is XTI/USD.

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