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Crude oil is one of the most highly traded commodities in the world, due to its status as the global economy’s primary source of energy. It is generally refined into various products, ranging from diesel and gasoline, to lubricants, wax, and other petrochemicals.
Introduction to Trading Crude Oil CFDs
It is defined by Investopedia as a “naturally occurring petroleum product composed of hydrocarbon deposits and other organic materials”
Its use in a variety of different measures results in the formation of clear technical chart patterns, elevated volatility and tight spreads between various futures contracts.
For the traders who seek on how to trade crude oil CFDs, we dive into the types of crude oil, the fundamental drivers of crude oil, and the useful technical strategies to use when looking to initiate long or short positions.
Types of Crude Oil
There are two main forms of crude oil that are generally traded in financial markets: Brent crude oil and West Texas Intermediate (WTI) crude oil. Both grades of crude are affected by the same fundamental factors.
Brent Crude Oil
Brent is considered the global benchmark for crude oil. This is based on crude oil extracted from the North Sea and accounting for over two-thirds of oil contracts traded in financial markets.
West Texas Intermediate (WTI) Crude Oil
West Texas Intermediate, on the other hand, is America’s benchmark oil and is slightly sweeter and lighter in composition than Brent crude.
Chart prepared by Daniel Moss, created with TradingView
How to Trade Crude Oil CFDs Using Fundamental Analysis
Like many commodities, the price of crude oil is largely determined by supply and demand factors.
Supply Side Factors
Organization of Oil Exporting Countries (OPEC)
OPEC was established in the 1960s and sets production quotas for the 15 countries who make up the cartel. Major production cuts or increases can lead to significant changes in the price of crude oil. It has been seen most recently in the wake of the coronavirus pandemic in 2020.
OPEC announced a significant reduction in production of crude oil by its member nations. This allowed the price of WTI crude to rebound from a record low of -$40.32-per-barrel (that’s right, oil prices went negative in April 2020) to the highest levels since 2014 just over 18 months later.
Inventory Levels
Inventory data released by the American Petroleum Institute (API) and the Energy Information Administration (EIA) can give traders an idea of the amount of crude available to fulfil demand. This data is released on a weekly basis by both organizations and can be found on any credible economic calendar.
A surprising decrease in inventory levels can lead to a rise in crude oil prices, while a notable increase in inventories can weigh on the price of crude.
US API Crude Oil Stock Change
Oil Suppliers
It is also important for oil traders to keep on top of situations involving other major oil suppliers. Geopolitical tensions can cause severe volatility in crude oil markets. One such example is military conflicts in Russia and Ukraine, and in the Middle East. This can lead to spontaneous spikes higher in prices as concerns grow surrounding the security of supply.
Demand Side Factors
Seasonal Factors
Given its use in a variety of different heating applications and in travel in general, seasonal factors can impact the price of crude oil. Generally, the colder a given winter on average, the higher the demand for heating, which can lead to an elevated oil price.
Hotter summers can also result in increased travel as people try to maximize their time in warmer weather. This might lead to increased demand for gasoline products.
Consumption Factors
Travel statistics and consumption data from the more populous regions in the world, such as the US and Europe, can give traders a rough idea of the overall demand for crude oil.
Economic growth tends to coincide with increased demand for oil, so in times of economic booms it is not uncommon to see oil prices rise significantly. The reverse is also true, with depressions and recessions tending to coincide with a slide in the overall price of oil.
How to Trade Crude Oil CFDs Using Technical Analysis
A variety of technical strategies can be used to trade crude oil. This depends on a specific trader’s personality, preferences and time-frame. One such strategy may include the use of both Bollinger Bands and the Relative Strength Index, or RSI.
As seen on the chart below, price tends to stay within the confines of the Bollinger Band, bouncing between support and resistance consistently as buyers and sellers trade blows. Using the RSI can identify buying opportunities in tandem with the Bollinger Band.
For example, a long position can be implemented when price bounces away from the lower Bollinger Band while the RSI crosses above its 14-day simple moving average. Conversely, a short position can be initiated when price pushes away from the upper Bollinger Band in tandem with the RSI crossing back below its 14-day SMA.
This is a simple yet powerful strategy that can help traders identify various trading opportunities.
Chart prepared by Daniel Moss, created with TradingView
Key Points to Takeaway before Trading Crude Oil CFDs
As we have seen above, there are a multitude of different fundamental and technical factors that can influence the price of crude oil on any given day.
From supply side constraints, to increased demand, it is of the utmost important that traders keep on top of as much of the above factors as possible when looking to successfully trade oil.
- Organization of Oil Exporting Countries (OPEC)
- Inventory data
- Oil Suppliers
- Seasonal Factors
- Consumption Factors
Given the volatility of the asset, it is also important to implement appropriate risk mitigation strategies. This can be through setting a stop loss on each trade placed, actively setting price alerts that may invalidate various technical patterns, and ensuring not having open positions prior to key data releases.
Trade Crude Oil CFDs with Vantage
Vantage gives traders the ability to trade Crude Oil CFDs, such as West Texas Intermediate Crude Oil futures and cash, and Brent Crude Oil cash with 10:1 leverage. With competitive spreads, traders can go long and short five days a week, to take advantage of any opportunities you may be presented with.
You can open your live trading account in less than five minutes with Vantage to start crude oil trading. Vantage also provides a free demo account. This will allow you to practice various trading strategies and techniques without having to deploy your own capital.
Follow the link above to find out how you can get started!
