Crude oil is at the heart of many global industries. It is the power that moves most vehicles, allows factories to operate and is used to generate electricity. Oil’s importance to mankind has made it a valuable commodity for many companies and countries. Along with its derivatives, crude oil is the most traded commodity in the world.
As an investment, crude oil is a popular tradable instrument. Do you need to buy oil barrels and keep them in your back yard? Of course not. Nowadays you can invest in the price of oil online in the form of CFDs, without having to actually buy and store it.
Confused? Take a look at this short, informative video.
The difference between Crude oil and Brent oil
Many new oil traders are confused about the difference between Crude oil, West Texas Intermediate (WTI) crude and Brent oil. What’s the difference? Well, the oil drilled in Texas is not the same as the oil drilled in the Middle East or Europe, so there are different benchmarks for different crude oil prices. Here‘s a simple explanation of three commonly used terms:
A general name for naturally-occurring, unprocessed oil.
A classification of sweet, light crude oil, originally drilled in Europe.
A classification of sweet, light crude oil, which is drilled in Texas, United States.
The prices of WTI and Brent fluctuate constantly. Online investors can choose to trade either or both, and take advantage of the changes in price.
Trading crude oil with leverage
When you invest in the price of crude oil CFDs with iFOREX, you can open deals that are worth up to 200 times your initial investment. What, exactly, does this mean? It simply means that with a $200 investment you can open a deal worth up to $40,000, using leverage.
Remember: Leverage maximizes your trading ‘power’, but also the risk to your investment. It is an extremely useful trading tool, but it needs to be used carefully.
The key elements of crude oil trading in the form of CFDs
- Oil prices are extremely volatile, offering many trading opportunities
- You can take advantage of oil prices moving up (long positions) or down (short positions)
- You don’t need to actually own or store the oil
- You can trade crude oil with leverage, openning large deals with a relatively small investment
- You can trade from home, in your free time
- You can trade anywhere and anytime using an advanced trading platform for web and mobile
How to invest in the price of crude oil in the form of CFDs
When you trade oil online, you buy ‘contracts’ (Contracts For Difference, or CFDs). In the case of crude oil, each contract represents one oil barrel.Are you ready to learn how to open your first crude oil deal? Simply follow these three steps.
- Choose your instrument In this example, let’s say you want to trade WTI oil. If the price of a single oil barrel is $50, one oil CFD will also be worth $50.
- Choose your deal size Leverage allows you to purchase up to 200 times more WTI oil with your investment. So, with a $200 investment and a 200:1 leverage, you can purchase $40,000 worth of WTI oil, or, in this case, 800 contracts.Why $40,000? Because: $200 (investment) × 200 (leverage) = $40,000
- Choose Direction When you trade the price of WTI oil online, you can open trades even when you believe prices will drop. If you believe prices will rise, open a ‘Buy’ deal, if you believe they will drop, open a ‘Sell’ deal. Let’s say you choose ‘Sell’. Now what?
- Close Your WTI oil deal and collect your profit Now, let’s say the price of a single oil barrel (a single contract) has dropped to $49 and you decide to close your ‘Sell’ deal.
Which factors affect crude oil prices?
The main factors that affect the price of crude oil are pretty obvious: Supply and demand. When you look a bit deeper though, you will see that there are many geopolitical factors with the power to drive the volatility of the oil market. A slowdown in a large economy such as China, a political crises or the signing of a new treaty can all affect the price of crude oil. Here are a few historic examples of major events and how they impacted oil’s volatility.
By following the news, reading market analysis and staying informed about major global events, investors obtain important information that can help them make trading decisions.
It is also important to note that crude oil remains a vital source of energy, and the driving power behind numerous industries. This is why changes in oil price can potentially create market-wide shockwaves, affecting many industries and tradable assets.
Want some examples? You got it…
Shares of airline companies, energy companies, manufacturing companies, automobile companies and many others can be affected by even a small change in the oil price. Furthermore, the currencies of countries that depend on oil exports for revenues, such as Russia, Saudi Arabia or Norway, can also be affected.