Making money on oil: asset price, charts, Forex trading18 min read
Oil is one of the most popular commodity assets, which is always at the peak of the interests of traders. It is at the same time an interesting and difficult asset, and those who understand the topic, make capital on oil trading.
Today, we will complete a “total immersion” in the subject and will try to tell you everything you need to know to start trading oil, including the forex market. How the oil markets arose, how things will be in the future, how effective the developed tools are, how to start selling oil to a simple trader, what strategies and tactics can be used for maximum profitability on the “black gold” movements, and which brokers have the best to trade this asset – we will tell about it in this article.
What are the grades of oil and how do they differ?
Oil produced in different parts of the world is very diverse in its chemical composition and properties. In order to somehow classify oil and build a pricing mechanism, special markings were invented: oil was divided into reference (best, marker) varieties and all the rest.
Marker varieties of oil came up with in order to simply form the price of other exported varieties of this mineral. Such varieties in Russia are Urals, Siberian Lights, REBCO, Sokol, Vityaz and some other brands.
Reference grades of “black gold” are those that have a special composition. In this particular case, the decisive role is played by parameters such as its sulfur content, as well as density. Today, the market sells 3 main varieties of the reference type. This is primarily Brent and WTI, and sometimes they include the Dubai Crude. Quotation organizations regularly publish quotes for these varieties.
- Brent oil (Brent) – is produced in the North Sea. It is designed for the European and Asian markets. The cost of more than half of the sold varieties of “black gold” are determined on the basis of Brent quotes;
- WTI oil (Double-ti-ah) – designed for the western states of the United States. It is also used as a measure for other grades of “black gold”. In the past century, for a long time, WTI was considered a unique reference variety;
- Dubai Crude oil – it is often used to determine the value of “black gold”, which is exported from the states located in the waters of the Persian Gulf and in the large Asian-Pacific region.
As a rule, marker varieties are tied to specific deposits or to their entire groups, the “black gold” of which has identical characteristics and is sold in markets with good liquidity.
The traditional grade of WTI is light oil, which is produced in the United States in the territory of the state of Texas. Its cost is used to calculate the cost of other grades of oil that is produced in the United States, as well as to determine the value of a variety that is imported into this country from abroad.
Brand Brent, which is mined in Europe, has a good density and provides a high concentration of a substance such as sulfur. First, Brent was mined in the UK. Then the geography expanded and began to rank the raw materials that were mined on the territory of the Norwegian islands. Now Brent is the most accurate marker of the global value of “black gold” for the last period.
Oil prices and online asset value charts
The course (price) of oil is the spot priceone barrel of this mineral reference grade. Based on the price of marker varieties of oil, prices are formed for all other, so-called export varieties. In stock trading, as a rule, to refer to the price of oil use the term “quote”.
Prices for marker varieties are formed on the major world exchanges. So Brent is traded on ICE , and WTI on NYMEX .
In order for everyone to understand what kind of oil is sold on the exchange, international designations were introduced. There are many of them, we give only the main ones:
UKOIL – the cost of Brent, in USD
USOIL – brand of WTI oil price, expressed in US dollars
BRN8 – futures for Brent (N – contract number, 8 – year supply)
XBZ – CFD contracts for oil of Brent
and so on…
Now, having seen the stock quote, USOIL = 71, you will know that the price of WTI oil is now $ 71 per barrel.
Oil quotes are a key factor affecting the stock markets of the largest oil-producing countries in the world, including the United States and Russia.
How can you sell oil to an ordinary person?
With the advent of futures, the opportunity to invest in black gold and make money by changing its price appeared to almost everyone. Now you only need to have a PC or phone with Internet access, and you can become an oil investor or trader. To do this, you need to register with an online broker that provides access to oil trading and make a deal. Of course, if you want the deal to make a profit, you cannot do without a comprehensive analysis of the situation on the market, because you need to correctly determine the direction of the price of oil in the future.
Let’s see what options to make money on oil is available to individuals.
Futures for oil
Those wishing to make money on the purchase / sale of oil abound. Only few people would want to do this if it were necessary to arrive, for example, in Kuwait, fill tanks of crude oil with a tanker and then take it to the other end of the world to sell to a potential buyer. Agree, costly occupation, both in time and in the means. Therefore, oil futures were invented – purchase / sale contracts that will be executed in the future at the price set now, and fully correspond to the movement of real oil prices. By purchasing such a contract, the buyer becomes in fact the owner of a certain amount of oil, but he does not need to physically transport and store it. At any time, he can sell futures at the current market price.
Now almost all the world oil trade is futures trading, with the only difference being that the companies are supply futures, and for traders – settlement ones.
Let us explain: deliverable futures – the obligation to physically deliver an asset (in this case oil), settlement – it is necessary to fulfill the obligation only in monetary terms.
Oil futures are traded on specialized futures exchanges. Recently, the tool has become increasingly popular and not only economic giants in the person of the United States and Europe, but also catching up – Asia, the CIS, the countries of South America, have joined the trade.
In the Russian market only settlement oil futures are traded. Trades on them occur by month and have the following features:
- 6 futures contracts are traded on the market at any one time;
- the easiest way is to buy / sell the closest contract (for example, in November the November futures will have the greatest liquidity), but it will also be the cheapest;
- Completion of the last available contract (expiration) comes after 6 months.
- the closer the futures expiration, the lower its cost (the difference in price between the nearest 1st and last 6th contract can be 6-9%).
Unfortunately, there are no delivery contracts in the Russian market.
Where to buy: To date, the main trading in oil futures is conducted on the stock exchanges:
NYMEX – New York
ICE Raw Materials Exchange –
CME Intercontinental Exchange – Chicago
LME – London Metal Exchange
SGX – Singapore Exchange
MOEX – Moscow Exchange
SPB – St. Petersburg Stock Exchange
What amount is needed: the minimum that you can buy on the exchange is 1 lot, which is 10 barrels of oil. We consider: 1 barrel at the time of writing this article is equal to 83 USD, which means the minimum investment amount = 830 USD.
Forex and CFD oil contracts
The purchase of futures for oil through a stock broker is associated with a number of difficulties, such as the complicated registration and verification procedure, the rather high minimum purchase threshold (10 barrels). A simpler option for an ordinary trader is to buy futures in the forex or CFD market.
Tip: it is better for novice investors to buy not the futures, but the CFD contract on the futures price.
Trading in “black gold” on the Forex trading platform is carried out in almost the same way as currency transactions. Here you will also find the usual selling price, purchase price and, of course, the spread. The only difference between them is that oil and currencies have different leverage and margins. For example, one contract for trading with raw materials may be equivalent to ten, one hundred, one thousand barrels. Their evaluation should be made in dollars.
CFDs are an analogue of trading in oil on forex, but it is advantageously distinguished by the possibility of flexible adjustment of leverage. Read about the advantages and disadvantages of CFD .
Where to buy: forex brokers, providing the opportunity to trade in oil.
How to buy: open an account with a broker, download the MT4 or MT5 trading terminal, make a deposit and open a deal to buy oil.
What amount is needed: here you can start with a more modest start-up capital, thanks to the leverage provided by the broker. The average deposit of traders in forex commodity contracts is about $ 300.
Binary Options Oil Trading
Also a good option for beginners who want to make money on oil, binary options will be. And that’s why:
- Binary options are the easiest type of trading. Here you only need to guess the direction of the price of the asset.
- In binaries, the lowest entry threshold is by deposit and by transaction amount. You can start trading in black gold literally from $ 10 and bet $ 1 for each trading session.
- As a rule, brokers do not have a spread.
- You can earn quickly and a lot. Unlike stock futures and forex, where you need to wait for contracts to expire and timeframes to complete, here you can set a period of several minutes. Upon its completion, if your forecast turned out to be correct, you instantly make a profit equal in some cases to 70% of the rate.
However, you need to understand that the risks increase here.
Example. The current oil rate is $ 70.00 per barrel. You bet $ 100 on binary options that the rate will fall in the next 3 minutes. At the end of this time, the cost of oil was $ 69.99 per barrel. Your forecast turned out to be correct (no matter how much the asset price fell) and you get back your rate plus 70% (conditions of the Finmax broker) of the amount of the bet, i.e. another $ 70. And this is in 3 minutes!
There is another important point. The binary options market is simpler than the forex and stock market from a technical point of view, which has recently led to the emergence of a large number of non-professional and even frankly fraudulent companies in this field. Speaking more simply, businessmen appeared who simply want to “put on” unsuspecting clients. Getting to such brokers, you are 99% likely to lose your money. Therefore, it is worth carefully choosing a broker to trade in BO. There are worthy companies on the market that have confirmed their reputation with time and trader reviews.
From binary options brokers for trading commodity assets (including oil) we can recommend Finmax. This company has been on the market since 2015. It has a reliable Russian (not offshore!) Regulator – CROFR, which guarantees you the protection of your interests in the event of a dispute. Broker guarantees instant execution of orders. Most reviews are positive. We ourselves have tested almost all the broker brokers and Finmax really is one of the best.
How to start trading?
Consider the process of trading for example broker Finmax. Everything is very simple. First you need to register.
Life hacking! For our clients, Finmax is subject to a private condition: you can enter into one trial transaction. If your prediction is wrong, the money will be returned to the account. Such a risk-free transaction will allow you to understand the principle of operation of options and start trading oil without fear of incurring a loss.
1. Select the asset Crude Oil.
2. Set the expiration time (step 5 minutes).
3. Choose where the price goes – up or down.
4. Press the “Buy” button.
That’s all. Successful trade!
“Black Gold” from brokers
Now the cost of oil is closely watched even by those who are only hearsay familiar with trading on the stock exchange. This is due to the peg of the dollar to oil. In general, oil trade volumes have a common standard of volume – 1 thousand barrels per 1 contract created. If you look beyond Forex, then there appear any volumes that are calculated even in the cars.
The time of trading in “black gold” through Forex starts from the first day of the week at exactly 1 am GMT. They end on the last working day of the week, at 10 o’clock in the evening. Moreover, this rule is applicable, as to trading, in which both American oil and “black gold” from Great Britain participate. However, there is a slight break. It starts at 23 pm GMT and ends at 1 am. However, absolutely every contract has a specific expiration date. When it comes – contracts that have not been closed, are closed automatically. As for open orders, they are canceled. If you need to start trading again, then you will have the opportunity to open more positions. They will be calculated at the current rate. They will have a different expiration date.
What do oil quotes depend on?
Various factors can affect the change in the value of “black gold”. Let’s try to make out each of them separately.
1. Natural. To carry out effective trade for a long time and take a good position in the market, it is required to correctly calculate the volume of “black gold” deposits in a particular region. It is also necessary to determine the approximate period when they are exhausted. It is also important to take into account the climatic background. So, due to global warming, the volume of purchased oil can be significantly reduced.
2. Geopolitical.This factor implies the existence of specific agreements that have concluded between countries. A huge role is played by consortia of oil producers. Moreover, the cost of “black gold” is highly dependent on geopolitical tensions. Unfortunately, huge deposits of oil are found in those regions where military conflicts often occur. A striking example is Iraq, Libya, Sudan, Nigeria.
3. Crude oil reserves. Data on stocks of “black gold” in a particular state often leaks to the media and can dramatically change the existing course.
How friendly are the US dollar and oil?
In the process of trading in “black gold” one cannot do without using the American currency. Each of the transactions is in US dollars. It is not surprising. After all, it is much more convenient to pay them than other currencies. Otherwise, traders and players of exchange trades would be forced to do unnecessary operations.
At the moment, oil is regarded as a self-sufficient currency. At the same time, all existing national currencies are equivalent to US dollars. And that, in turn, is strongly tied to “black gold”. That is, the change in the cost of oil instantly affects the dollar, the national currencies of other countries. In particular, it is sensitive to similar fluctuations and the euro.
During the last fifty trading days, “black gold” daily showed on average fluctuations in the range from 1 to 2%. This figure is significantly inferior to last year’s result. If we compare with the average figures, which are dated 1983, it is clear that from the beginning of 2015 to the beginning of last year, prices almost came close to the lowest minimum. And everyday volatility fluctuations reached about “plus” – “minus” 4%.
In other words, today volatility in the markets where black gold is traded is moderate. However, it is not immune to modification. The geopolitical situation in the Middle East and South Korea can make adjustments. Also a significant role can be played by the dynamics of the performance of the AMG, Eurosceptic sentiment, the policy of the US Federal Reserve. The latter is regularly enriched by capital markets, which are only at the development stage. Once again, it is worth recalling that, based on historical experience, the volatility of the value of “black gold in average daily terms can remain quite high.
What strategies apply to trade in oil?
As for the main indicators that traders use in the process of trading “black gold”, they are as follows:
o Bollinger Bands;
However, you can use such an addition as the time-tested Price Action . It analyzes candlestick patterns, trends and the power of trends, determines the levels of support, as well as resistance. At the same time, he studies trend lines, graphic figures and, in general, improves your trading. Moreover, the graphics of “black gold” have one distinctive feature. They reflect protracted long-term trends, which are characterized by a small number of kickbacks and false carryouts.
The so-called VSA method also performed well . It is great for trading various commodities, as well as futures. The latter are the most effective trading solution when working with “black gold”. So, VSA is filled with new opportunities that will be very useful for traders in making oil deals. At the same time, VSA is renowned for its excellent capabilities in forecasting and identifying advanced market trends.
Seasonal factors directly influence any energy carriers, as well as other commodity groups. Just in case, it is worth recalling that seasonality is a combination of various events that lead to an unpredictable increase or decrease in the prices of underlying assets during the studied period of time. Some traders take these factors into account when drawing up their own strategies.
Considering that “black gold” is a source of energy, its sales increase significantly in winter. That is when it becomes very cold in North America. By the way, recently this pattern reminds of itself with enviable regularity. Meteorologists even had to use a special term. In this case, we are talking about the polar vortex. This name they assigned to the climatic phenomenon that exposes the Great Lakes to strong frosts. Often, this impulse is recorded in months such as January, February. It is valid until March. All this applies to fuel oil. After all, they are heated private houses, industrial buildings. They also generate electricity from fuel oil. Do not forget that during the winter, nights last longer than in summer.
Then follows a characteristic decline, which stretches before the onset of summer. In favorable weather, an overwhelming number of people go on vacation and, therefore, the cost of gasoline increases. In parallel, until September, the oil price also increases. After which its value drops sharply. But not for long. With the advent of the new year, she again becomes more expensive, winning back the lost positions.
There are several factors that can explain such price fluctuations. First of all, people are starting to buy less fuel, because the car season is over, and the main work in the fields has already been completed. Also make a contribution and hot summer. To save themselves from the heat, consumers use electricity for air conditioning. As for generating companies, instead of fuel oil, they begin to use gas. Since the latter in the United States is not distinguished by high cost and complies with current environmental regulations. At the same time, there is a consistently high level of supply for “black gold” and petroleum products. Indeed, in the summer, it is much easier to extract the necessary raw materials from the depths and transport them. This is especially true of the Northern Hemisphere.
On the other hand, it is possible to call elastic demand with great stretch. It is influenced by the dynamics of global economic processes. Therefore, it is not surprising that many manufactures predominantly store manufactured “products”. In other words, energy is simply pumped into special tanks. This is clearly seen in fifteen, twelve, and ten-year data. But on the nine-and seven-year picture looks less clear. This is due to the influence of recent years.
However, some trends of the seasons in one or another expression still persist. With their help, you can choose the right direction for transactions. In other words, if the perennial laws go against the technical component, then it is more rational to ignore speculative operations. And vice versa.
As mentioned above, the changing mood of traders, specific factors, the cost of different labels of “black gold” or products made from it may not coincide with each other. Such a discord between the prices of close assets is called the “inter-item spread”. It is necessary to take into account the fact that this term does not cause the usual difference between ASK and BID. By the way, data on these quotes are found in the toolkit specification.
Since the functionality of such a terminal as MetaTrader4 is limited and lacks numerous options that popular exchanges are equipped with, the so-called spread between CFDs for “black gold” is required to be formed using additional indicators.
Spread trading is almost identical to trading where oscillators are used. That is, they are accompanied by trend indicators, lines, graphic patterns, etc.
The situation in the oil market today and the trend for the long term.
Once Myron Watkins, who was an excellent expert in the field of economics and worked at the world famous New York University, said that one of the problems of oil is that it is always in excess or, conversely, is negligible. Oh, how he was right. Especially, his statement is relevant in recent years. World markets are facing excessive supply, and OPEC member countries are forced to seek a compromise and significantly limit the production of “black gold”. They do this in order to stabilize the cost and gain precious time to implement a whole package of extensive reforms, without which the industry will simply not survive in the future.
Recently, the cost of production of “black gold” shale in the United States has fallen to $ 20 per barrel. In other words, it has become equivalent to the price of extraction by the traditional method. First of all, the current trend is explained by the fact that the technology for extracting shale raw materials is constantly being improved. For example, in 2012, the cost of extraction through this method reached $ 100, but last year this figure was reduced by a factor of five.
At present, the most budgetary extraction of “black gold” from the bowels of the earth is made in a state like Saudi Arabia, as well as in Iran. If we talk about the Russian Federation, then the already existing fields suggest the extraction of raw materials from the bowels of the earth at a cost of six dollars. At the same time, the unexplored ones provide another figure – $ 16.
Crude “black gold” of the WTI brand rapidly grew in value after the end of World War I. It reached its maximum in the twenties of the twentieth century, and then moved sideways. And only an embargo in the seventies provoked a parabolic rally, which was stuck at around $ 120. WTI oil reached its peak at the dawn of the seventies, after which it was the turn of a tortuous decline that lasted until the beginning of the two thousandths. It was then that international business activity experienced a severe recession.
As a result, “black gold” in the summer of 2008 reached the highest price indicators and stopped at around $ 144 per barrel. But by 2010, it was trading in the range of $ 70-130. In this value segment, it was holding up to the “equator” of 2014. Then there was a powerful decline. As for today’s day, WTI oil is sold in the range of $ 45-46 per barrel. Nowadays, the main problem of the oil market is the overproduction of raw materials. It was provoked by insufficient global demand and increased shale mining in the United States. All this led to a decrease in the value of “black gold”. Fuel to the fire poured and the abolition of sanctions imposed once against the Iranian authorities. As soon as they were abolished, the price of Brent crude fell to almost $ 27.70 per barrel. Thus, the thirteen-year minimum has been updated.
There is nothing left for exporting countries to solve this problem by reducing quotas for the extraction of “black gold”. But this is only a temporary measure that reduces the symptoms. It is necessary to look for other tools to solve the existing problem. Otherwise, overproduction of oil in the foreseeable future cannot be avoided. It is possible that now only a gradual recovery of world economic processes, industrial activity and demand from customers can create a favorable climate for increasing the cost of oil.
“Black Gold” is an attractive investment asset, as it has a high volatility. Given the possible change in the course of this raw material over a short period of time, you can get a good profit.
As you have already seen, CFD for oil offers great opportunities for traders. They can make quick speculative and investment decisions. At the same time, oil is the only commodity asset available in the line of almost all DCs.
If we talk about the benefits of contracts involving oil or currency pairs, other assets, the former are more predictable. True, this rule applies only to interroom spreads.
However, for successful trading in oil, you must have certain knowledge and have extensive experience. Moreover, it takes all the time to keep abreast of the market and all the time to follow the news that comes from different areas.