Oil CFDs: How It Works And How To Trade

Oil is one of the most traded raw materials in the world. However, it is essential to keep in mind that crude oil markets are often quite volatile, which is one of the main reasons most people are attracted to this commodity.

For instance, in times of economic or geographic instability, oil prices often fluctuate, hence creating trading opportunities for seasoned traders.

Crude oil CFDs are quite popular for speculating on oil prices. CFDs (Contract for Differences) are derivatives that allow traders to speculate on movements of underlying assets, without buying crude oil at its spot price. 

In oil CFD trading, traders agree to exchange the difference in value between opening and closing positions. The high volatility of today’s oil market means that traders can either make profits or losses ^[1].

Oil CFDs require traders to trade with leverage. Therefore, you are only required to place a fraction of the total value to open a position. This gives traders better exposure to the crude oil market and can amplify profits or losses. However, this also exposes them to a higher risk of losses, making it essential that they adopt effective risk management strategies when trading.

CFDs in the Oil Industry

Oil trading is a category of the commodities industry that produces a wide variety of international commodities, such as Crude Oil WTI and Crude Oil Brent, as well as local commodities, such as heating oil and natural gas for homes.

Oil prices typically fluctuate depending on current supply and demand, as well as on their origins. Oil trading prices, on the other hand, vary during periods of volatility. There are two commonly traded crude oil benchmarks – WTI (West Texas Intermediate) and Brent, both of which can be accessed on various trading platforms.

However, there are various differences between Brent and WTI crude oil that traders should consider when choosing their preferred trading commodity. 

For instance, Brent crude oil is typically sourced from the North Sea and has greater international prevalence, whereas WTI oil is sourced from fields in Louisiana and Texas. WTI crude oil is seen as a sweeter, lighter alternative with low sulfur content.

However, Brent is sourced closer to the sea, hence reducing transport costs compared with WTI crude oil, which is sourced inland. These factors can affect the prices of both Brent and WTI CFDs, especially when buying or selling the underlying commodities.

Brent Vs WTI Oil Prices

In the recent past, Brent crude oil has been more susceptible to political, geographical, and economic instabilities and pressures. Since Brent crude oil is more widely accessible to traders worldwide, its prices tend to fluctuate during crises and often surge. 

On the other hand, WTI crude oil is less commonly available and is not affected by most international events. As a result, WTI oil prices tend to remain lower throughout the year. It is vital for oil CFD traders to understand these external factors because they form part of the fundamental analysis of oil markets.

Some people enjoy the excitement that comes with trading in such volatile markets. Trading on margin, otherwise known as leveraged trading, allows you full exposure to various financial assets. However, leverage trading in volatile markets also amplifies the risk of significant loss.

Guide to trading oil CFDs

Choose the oil commodity you want to trade – WTI, Brent, or both

Open an oil CFD account and deposit funds. As touched upon above, it is essential to adopt effective risk management strategies when trading with leverage. For instance, you can mitigate losses by using stop loss orders, which close positions once your trades reach your bottom limit.

Stay updated with the latest analysis and news

For instance, traders can follow crude oil market analysts who provide breakdowns of global news and can predict possible political or economic trends and their impact on global oil markets. This can be considered by traders, as oil CFDs are highly volatile.

Create a trading plan

There are numerous short-term and long-term strategies that you can use when trading oil CFDs. Choose one that suits your goals and preferences.

If you want to trade various energy commodities, including heating oil and natural gas, you can opt for commodity baskets. This allows you to trade oil CFDs on a wide range of commodities in just one trade and potentially helps spread the overall risk of leveraged trading.

Factors Affecting Oil Prices

Crude oil prices are determined by three main factors:

• Supply – Typically includes oil resources that can be extracted from the sea or land, as well as oil resources that consist mainly of daily, weekly, or even monthly amounts of crude oil barrels produced at a financially beneficial price.
• Demand – Dependence on oil supplies to maintain economic growth, and the use of alternative energy sources such as solar, hydroelectric, and wind energy.
• Relations among players in global oil markets – These relations usually include production agreements among major oil producers on how much each should produce. On the other hand, economic or political sanctions imposed on or lifted from oil-producing countries such as Qatar, Iran, Russia, or Venezuela can cause fluctuations in oil prices as well as in the prices of other related commodities. For instance, a decision by OPEC+ to reduce supply causes a spike in oil prices ^[2].

Trading oil CFD futures

Traders can also use contracts for difference to speculate on price movements in the oil market. Oil CFD futures are contracts that allow traders to buy or sell oil at a specified price in the future. Oil CFD futures are typically traded on local exchanges. 

Although oil futures are not traded through CFDs, CFDs allow investors to trade price movements in futures contracts.

WTI futures prices are usually lower than Brent’s. These prices are usually determined by the commodities’ spot prices.

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