Trading Oil with Contract for Differences (CFD’s)

• Trading oil
• How to Trade Crude Oil?
• What is a CFD?
• Why Trade Crude Oil CFDs?
• Why Now?
• What’s the Best Crude Oil Trading Strategy?

Crude oil markets are experiencing a period of extreme volatility, making them some of the most alluring prospects for investors around the world.

“Escalating tensions in the Middle East have stimulated concerns over potential supply disruptions; this is the main culprit behind oil’s recent aggressive appreciation,” explains Lukman Otunuga, Research Analyst at FXTM.

You may believe that buying and selling commodities like crude oil is reserved purely for market heavyweights and institutional traders. However, derivatives like contracts for difference allow retail and day traders to try their luck in the turbulent commodities markets. So, how can you get involved? Read on to discover all you need to know about trading crude oil CFDs.

Trading oil

Crude oil is the unrefined fossil fuel from which ubiquitous petrochemical products like petrol and diesel are distilled. Rough estimates suggest that the world gets through a staggering 95 million barrels of crude (including biofuels) every single day, with global demand expected to top 99 million barrels a day this year. It should come as no surprise that crude oil is one of the most important and frequently-traded commodities in the financial markets. There are many different kinds of crude oil, generally named for the location of extraction, but West Texas Intermediate (WTI), Brent and Dubai-Oman are the most common industry benchmarks when it comes to pricing crude oil.

How to Trade Crude Oil?

For obvious reasons, investors rarely buy crude oil with the intention of taking possession of barrels of ‘black gold’. Unless you have a serious amount of capital behind you and intend to buy barrels outright, there are only two ways to trade crude oil: futures and CFDs. Traders can also buy equities in listed energy companies involved in the mining and refining of crude products, such as Royal Dutch Shell, BP, and ExxonMobil.

Crude oil futures are usually the domain of institutional traders like pension funds, insurance companies, and mutual fund families. CFDs are more commonly traded by retail clients using a trusted broker. Both enjoy many of the benefits offered by financial derivatives in general, such as high leverage. However, the market for crude oil CFDs is considered more liquid thanks to its wide accessibility (see below for more information about the advantages of trading CFDs).

FXTM, an award-winning, global broker, offers CFDs on two different crude oil instruments: UK Brent (Spot) and US Crude (Spot). Which leads us to…

What is a CFD?

Contracts for difference, or CFDs, are a tradable instrument that represents an agreement between the buyer and seller of a specific asset. Potential profits and losses are based on the movements of a specific asset that underpins the CFD which can be utilized into trading. Depending on market movements, the trader and CFD provider agree to pay each other the difference in the underlying asset’s price over an agreed period of time. It’s important to remember that, unlike equities and bonds, the underlying asset is never actually owned by the investor.

Trading CFDs allows investors to speculate on price movements in many of the world’s biggest financial markets, including commodities, forex, stocks, bonds, and indices. FXTM offers CFDs on equities, indices and three types of commodities: UK Brent (Spot), US Natural Gas (Spot) and US Crude (Spot).

Why Trade Crude Oil CFDs?

Trading CFDs has become increasingly popular over the last few years. This is because CFDs offer a number of advantages over other financial instruments:

• Access to multiple markets from a single platform – investors can speculate on all the major markets, from currency to commodities.
• Diverse trading options – trading CFDs on multiple instruments is a great way to ensure flexible treading opportunities and a varied investment portfolio.
• Higher Leverage – Margin requirements are often significantly lower for CFDs than alternative trading options. FXTM offers flexible leverage, ranging from 1:25 to 1:500 on commodity CFDs (depending on client’s knowledge and experience).
• Accessibility – while some financial markets have minimum capital requirements for day trading, CFDs do not. This makes them an alluring option for day traders. Trading CFDs with a reputable broker like FXTM allows day traders quick and easy access to the commodities market.
• Liquidity – CFDs are generally traded directly with the broker, which acts as the market maker – this generates a greater degree of liquidity that is present in other financial derivatives like futures.
• Flexibility – CFDs aren’t restricted by the rigid expiry dates of futures contracts. This means that a CFD contract can run indefinitely, as long as it’s backed by sufficient capital and agreed on by the buyer and seller.
• Competitive trading costs – FXTM’s CFDs on crude oil are designed to give investors the benefits of trading commodities on an exchange, without the associated costs. For example, a $1000 deposit with FXTM incurs a commission fee of only $2.08.

Why Now?

From bonds to cryptocurrencies, 2018 has already been characterized by market turbulence. This is especially true in the oil markets, which remain volatile thanks to escalating tensions in the Middle East and ongoing concerns over supply disruption. The potential profits available in such a volatile market mean that crude oil is an extremely attractive prospect to institutional and retail traders alike. Before you’re lured in by the prospect of huge gains, remember that such volatility amplifies losses as well as profits. “While oil is likely to remain supported by geopolitical risk and a vulnerable U.S Dollar for the moment, soaring U.S Shale production has the ability to cap upside gains” argues FXTM’s Lukman Otunuga.

What’s the Best Crude Oil Trading Strategy?

It should come as no surprise that the secret to trading CFDs on oil is hard work, patience, and preparation. Macroeconomic factors and geopolitical unease have an enormous influence on crude’s market trajectory: simply put, it pays to keep an eye on the news. Given the importance of the oil trade in economic and industrial terms, it is rarely far from the headlines.

Education is also key. Respected brokers like FXTM operate on the principle that the best trader is an educated one, so make sure you do your homework before you begin trading. Visit FXTM’s education page for a veritable treasure trove of webinars, articles, videos, and tips – everything you need to prepare yourself for the rigors of CFD trading. There’s nothing wrong with a dress rehearsal or two, so why not open a demo account with FXTM for a little risk-free practice?