Planning to invest in crude oil futures market? Here’s all that you need to know

Mar 6, 2018 by

Besides global supply and demand, several other factors play an essential role in the crude oil price fluctuations. Even a high-school kid would be able to tell that these days; oil may not prove to be a safer bet due to unstable political and economic scenarios around the world. However, there are thousands of traders out there who are making profits whenever its prices fall or rise every day.

Understanding the pitfalls, unique characteristics of the highly volatile crude oil trading is essential before your start oil futures trading.

Why are oil prices falling since the last few years?

Crude oil is produced on a large scale in the US, Saudi Arabia, and Russia. The economics of this commodity started changing drastically since 2014. The world is slowly moving towards energy efficient electric cars, plus, the United States has increased its oil production on a large scale during the last ten years. So, demand from certain countries is decreasing, but on the other hand, production is increasing. Thus, prices are falling. Experts believe that this trend may continue until 2024. The market condition may change quickly if nations start working on policies related to motivating electric vehicle manufacturing. Until then, the need for fuel would remain in place, and traders can continue making money by simply learning the art.

Understand how crude oil moves

Global economic prosperity, worldwide oil output, and of course the overall demand as well as supply are aspects that a trader needs to monitor before he or she starts trading.

Political situation and wars in oil-rich countries impact the oil supply and thus trigger short-term ups and downs in the oil market. The price of the US dollar also affects oil prices as oil is often bought and sold in dollars. Market sentiment is another crucial factor. Some traders start taking precautionary steps even based on their expectations and fear.

The fundamental principle is that when positive signals start appearing from all directions, crude oil starts showing definite uptrends. On the other hand, downtrends can be easily triggered when negative elements form a strong convergence causing oil price collapse.

The table-pounding talking heads, as well as front-page headlines, do manage to draw small players towards these markets. But, only professional traders can dominate energy markets.

Trading using a futures contract

If you understand the oil and gas sector very well, there are multiple avenues to make money. You can buy stocks of oil companies, directly buy and sell physical oil barrels (if you have adequate storage warehouses of course) or trade in oil futures market. The last one is the most preferred option these days.

Apparently, in crude oil futures markets, oil isn’t physically handled; all the transactions take place digitally. Traders use a digital account for operations and profits as well as the losses are reflected in the same.

There are several avenues when it comes to digitally trading in crude oil. However, a futures contract is the most widely chosen option. A futures contract is used while trading in gold, wheat, oil and multiple other commodities. Profit and losses are calculated according to the difference between buying and selling price for the contracts. (Depending on the number of ticks that the price moves from the cost at which you purchased the contract). To make life easy, most of the trading apps/software show profit or loss.

Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX) are the primary futures exchanges in the UK.

Brent and WTI (Western Intermediate) are two of the most popular markets (benchmarks) for crude oil trading. Oil drilled from oil fields in North Atlantic region comes under Brent while oil drilled in the U.S. Permian Basin and surrounding areas is traded under WTI label. The level of sulfur differs in both varieties.

There are several types of contracts that represent a number of barrels of oil. Contracts can be of 10,100, 500 or even of 1000 barrels. Each barrel consists of 162 liters of oil.

Crude oil experiences a lot of ups and downs (ticks) throughout the day, so, profit and loss for even a day can be huge enough.

The minimum amount of capital required for trading in oil futures contracts may vary from one broker to the other.

Wild guesses and speculation may not prove to be useful while trading. Thus, as mentioned earlier, knowledge, a bit of education about the sector is essential to play this game. People who rely on wild guess cannot sustain in this trade for longer.

Practice using trading platform’s dummy account

Your online trading platform plays a prominent role in your trading activity. You must go with someone who has a good reputation and offers quality service to perform secured transactions via apps for smartphones as well.

Before you start trading, it’s advisable to get all your queries sorted out from the trading company that you select. Also, read the fine print about local taxes and cess that apply to the account. This may vary from one country to the other.

Read all the documents related to profit and loss factors, costs, and risks carefully before trading.

If you are in Europe, Admiral Markets can prove to be an apt choice. The online trading platform allows traders to deal in CFDs and Forex on crypto currencies, bonds, stocks, metals, oil and other commodities. Their software solutions (including MetaTrader 4 and 5) for desktops and Android devices as well as iOS have positive reviews from existing users.

You can trade using multiple currencies. The company offers email and phone support in numerous languages as far as customer service is concerned. The organization operates under the Financial Conduct Authority (UK) regulations with a license from the Estonian Financial Supervision Authority.

Knowledge bases, seminars, webinars and e-books offered by Admiral can indeed prove to be helpful for traders who lack experience. So, their trading software is suitable for new as well as experienced traders.

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