Crude Oil Trading Explained
We at Financial Trading Explained have written this educational article to give you a foundation of knowledge about crude oil and crude oil trading. It should help you understand crude oil terminology and global news concerning this commodity.
Crude oil is one of the most popular commodities covered in the news around the world. Other names that you might know it by are Petroleum, Fuel, NYMEX, Brent, Black Gold or simply Oil. Most people will think of this commodity as something that goes into the tank of your car and if the price rises, so will the cost of filling up your car. This is all correct, but we at Financial Trading Explained want you to think of this commodity as so much more, something that can a have huge implications on a countries economy and can be even so vital that countries will go to war over this commodity.
Basic Economics, Supply & Demand
The concept is very simple. If supply goes down, principally less crude oil gets extracted and the price will rise. Reasons for crude oil supply dropping could be due to several factors, such as:
- Oil field has dried up
- Too expensive to extract
- War, infrastructure is damaged
- Intentionally, reduced by the producer to raise the price artificially
Demand, on the other hand, is the other factor to watch that influences the price of crude oil. Factors that influence demand include the following reasons:
- If an economy is growing or shrinking
Types of crude oil
The two most quoted crude oils in the media are West Texas Intermediate (WTI) and Brent Blend (North Sea). Some brokers will also call these two crude oils US and UK oil. There are numerous other crude oil types but these are the two types which are available to trade with most brokers. Looking into other types of crude oil might be of interest to some of you, but I would not qualify it as essential knowledge for trading. You might also hear terms that might interest you such as sweet oil, which simply means that this type of oil is low in sulphur, although this information might interest you, it is not directly relevant for trading.
Barrels and future lots
You will often hear the term a barrel of oil, which is simply a standardised amount equal to 42 U.S. gallons or 159 Litres.
When trading futures you also have a standardised size, which will normally be the same size your broker will offer as a CFD. One future is also known to professionals as one lot. One lot of WTI or Brent is the equivalent of 1000 barrels/$10 per point movement.
If, for example, WTI is currently at $53.31 per barrel and you are buying one lot, you will make $10 profit per cent movement of WTI. If the price would rise to $54 per barrel, you would have made a profit of 69 points x $10 = $690 profit.
Some brokers also offer smaller sizes, such as mini lots. In spread betting you are able to choose how much you want to trade directly. Please read my article Spread Betting vs CFDs vs Physical Shares Trading if you are unsure about the differences.
Top Oil Producers
|Rank of Oil Producers||Countries||Barrel Per Day (Millions)||OPEC|
|8||United Arab Emirates||3.2||Y|
These numbers have been accurate in the past but might not be accurate at the time you are reading them. This table has been added so that you can follow news on the supply side.
Top Oil Consumers
|Rank of Oil Consumers||Countries||Barrel Per Day (Millions)||OPEC|
These numbers have been accurate in the past but might not be accurate at the time you are reading them. The table has been added so that you can follow news on the demand side.
Organization of the Petroleum Exporting Countries or simply OPEC, is an international cartel that influences the price of crude oil. OPEC was founded in Baghdad Iraq in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC’s mission is to coordinate and unify the petroleum policies of the group.
In the past the simple way OPEC operated was if the crude oil price went too low, supply would be cut to boost the price. If the crude oil price would rise too high (causing global problems, such as economic issues for importers) they would increase production to push the price down. You could also think of OPEC as a central bank, just with oil rather than interest rates.
Most people will have heard this term as simply fracking. Basically it is a crude oil extraction technique, where oil is extracted horizontally rather than vertically. Pressure is used to crack open an oil deposit, as seen in the picture. This method is seen as more environmentally damaging and also is a more expensive way of extracting; therefore it is used primarily when a higher oil price can be achieved on the commodity market.
This article will give you a solid understanding about the essential factors of crude oil and crude oil trading. We at Financial Trading Explained, try to impart the knowledge we have acquired over the past years in our professional trading careers, to you as our reader. Our educational articles aim to help you start or improve your trading career.
Explained by Stefano Ceacmacudis