What is Crude Oil: What to Know Before Trading 

Crude oil is one of the most divisive materials of our time. It is undoubtedly critical to the global economy – not only for power generation purposes, but also in the manufacture of several other products – but its use is also undeniably linked to global warming and the accompanying negative consequences.  

In this article, we’ll explore the basics of crude oil, what it is, how it came to be, and what investors need to know when trading it  

What is Crude Oil? 

Crude oil is a naturally occurring liquid extracted from the crust of the Earth. It is one of the most important natural resources on the planet, and serves many essential uses ranging from fuel and power generation, to the creation and manufacture of plastics, as well as being used for several other important materials and products – including lubricating oils, tar, wax, solvents, and asphalt. 

While it is a natural resource, crude oil cannot be replaced naturally at the rate it is being consumed today. This makes crude oil a non-renewable natural resource.  

Crude oil’s importance cannot be overstated. It has been the primary source of energy for the past 70 years or more, and is likely to remain so for several more decades to come ^[1]. 

At the same time, an over-reliance on crude oil (and fossil fuels, for that matter) has been blamed for climate change, arguably the largest existential threat humanity has faced in recent memory.  

Where does Crude Oil come from? 

Crude oil (and natural gas) are known as fossil fuels, giving us a clue as to their origin.  

Like all fossil fuels, crude oil is created from the remains of organic matter. Plant and animal life gets trapped under layers of sand, silt, and rock, and is subject to extreme heat and pressure over millions of years.  

This results in the formation of crude oil, which is mainly composed of hydrocarbons, giving it its unique properties.  

Once crude oil deposits are found, specialised heavy machinery known as oil rigs is set up to extract the precious liquid. After extraction, crude oil is refined into several different by-products such as kerosene, petrol, paraffin, and others, before being sold to consumers.  

Crude oil may be found all around the world, but not every deposit may be extractable using current technological means. Some sites may also be passed over for extraction, as the cost of extraction would outweigh the value of the crude oil recovered.  

However, technological innovations can make previously unextractable crude oil accessible. For instance, the invention of hydro-fracturing enabled oil to be extracted from previously inaccessible shale rock, sparking off a second oil boom in the U.S. in the early 21st century ^[2]. 

One of the latest regions to watch for new oil discovery is Alaska and the Arctic. In early 2025, Trump signed an executive order to open up oil prospecting in the region. While the response is lukewarm for now, this could further boost the U.S. oil industry in time ^[3]. 

How is Crude Oil used? 

Crude oil has to be refined before use. This process breaks down the raw crude oil extracted from the Earth into different by-products with distinct properties, serving different uses.  

Some of the most important extracts of crude oil are fuels, such as diesel, petrol, kerosene, and jet fuel. These are used in transportation, power generation, and to heat buildings.  

Another important use of crude oil is in the plastics industry. All plastics are created using naphtha – extracted from crude oil – as a base. The naphtha is further processed at a plastics plant to create the basic building blocks required to create different plastic products ^[4]. 

The crude oil refining process also creates other byproducts, which have a variety of practical applications or are used in the manufacture of other products. These include lubricants, waxes, motor oil, asphalt, and other miscellaneous oils ^[5]. 

Crude Oil vs Petroleum 

The term “petroleum” is often used interchangeably with “crude oil”. The main difference between the two is that “petroleum” (or “petroleum products”) is the general term that includes crude oil, as well as the range of products and by-products resulting from crude oil refining.  

Meanwhile, the term “crude oil” refers to the actual raw, unprocessed liquid extracted from the earth at oil drilling sites. 

Trading Crude Oil 

Without hyperbole, crude oil is the most important commodity that’s traded around the world. The global oil market was valued at over USD 2.1 trillion in 2022, far dwarfing the 10 largest metals markets ^[6]. 

For some investors, crude oil can be a speculative asset due to its high volatility; a portfolio diversifier given its varying correlation to stocks; and a hedge against market downturns. However, it’s important to remember that these strategies carry risks, and the volatile nature of crude oil can lead to significant gains or losses. 

In this section, we’ll take a look at some key characteristics when trading crude oil.  

Two main benchmarks: WTI and Brent  

The global crude oil market is tracked by two major oil benchmarks, WTI and Brent. 

WTI (West Texas Intermediate) is a light, sweet crude oil that is sourced primarily from inland Texas, in the Permian Basin. As such, WTI acts as the main oil benchmark for North America, with the commodity being the underlying commodity for the NYMEX’s oil futures contract ^[7]. 

Brent Crude refers to light, sweet oil originating from oil fields in the North Sea between the Shetland Islands and Norway. Brent serves as the benchmark for the light oil market in Europe, Africa, and the Middle East. Due to its ubiquitousness, Brent is used as the benchmark for around 2/3s of the global oil market ^[8]. 

Supply and demand as main price drivers 

The crude oil market is mainly driven by supply and demand levels, which are, in turn, dependent on a variety of geopolitical factors.  

• Wars and hostilities. The Middle East is a major oil-producing region, and instability within the region can disrupt oil prices. Oil prices spiked following news of the Hamas attack on the Gaza Strip in October 2023 ^[9].  

• Policy changes. After Trump retook the White House in 2025, he undid environmental protections set during his predecessor’s term. This opened up Alaska and the Arctic region to oil prospecting efforts, which could foster increased US oil output. 

• Weather. Crude oil is the most widely used fuel for heating homes, and cold weather can cause oil prices go up. This was most recently seen in Jan 2025, with oil prices rising 1% due to increased winter demand ^[10]. 

Trade crude oil with Vantage via CFDs 

You can trade the dynamic price action of the global oil market with Vantage Contracts for Difference (CFDs). This is the preferred way to trade commodities such as crude oil, as CFDs allow exposure to price movements without the need to take physical delivery of barrels of oil.  

To start trading crude oil via CFDs with Vantage, follow these steps. 

1. Sign up for a Vantage live trading account.  

2. Fund your account to start trading. 

3. Choose your preferred crude oil CFDs – WTI, Brent, or both. 

4. Pick your strategy and look for appropriate opportunities to enter your trade. 

5. Don’t forget to monitor your positions and implement risk management tools such as stop losses and take profits.  

Conclusion 

Crude oil is a unique commodity that is driven by global supply and demand levels. The market exhibits varying levels of correlation to stocks, providing opportunities for diversification and to hedge against market downturns. While the relationship between inflation and oil prices is complex, savvy investors may see short-term price upswings during high inflation, while central bank actions to raise rates are likely to cause oil price reversals.  

With Vantage, stay up-to-date on the latest developments in the crude oil market with our educational library. Benefit from competitive spreads, low fees, and transparent pricing, and enjoy round-the-clock customer service as you explore the dynamic world of crude oil trading. Sign up today! 

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