Last Updated on June 21, 2022 by Oddmund Groette
Many traders are interested in trading crude oil because of its unique position within the world’s economic and political systems. But what exactly does crude oil trading mean?
Crude oil trading is the buying and selling of crude oil with the aim of making a profit. This is done via futures, options, or CFD contracts, as traders try to profit from crude oil price fluctuations. Since crude oil is a limited resource, its price can fluctuate dramatically due to changes in supply and demand.
We find oil very difficult to trade because it’s heavily influenced by macro news. However, at the bottom of this article, we have provided a few examples of how you can go about making crude oil trading strategies.
In this post, we will cover the following:
- What is crude oil?
- What does crude oil trading mean?
- How can you buy and trade crude oil?
- History of crude oil trading
What is crude oil?
Crude oil is a naturally occurring fossil fuel that is refined into useable products such as gasoline, diesel, and other petrochemicals. It is a nonrenewable resource, which means it can’t be naturally replaced at the rate we use it. This also makes it a limited resource.
What does crude oil trading mean?
Crude oil trading is the buying and selling of crude oil with the aim of making a profit. Traders participate in the crude oil market via futures, options, or CFD contracts, as their interest is only to profit from crude oil price fluctuations. The price of crude oil can fluctuate dramatically due to changes in supply and demand, given that crude oil is a limited resource.
Due to its unique place in the world’s economic and political systems, crude oil is a highly liquid asset, which is why traders love to trade it.
How can you buy and trade crude oil?
The common ways to trade on the crude oil market include the following:
- Crude oil futures: This is the most common way to trade crude oil, whether as a speculator or a stakeholder who wants physical delivery of the asset. Futures are standardized contracts and are traded on regulated exchanges.
- Oil ETFs: A slightly different way to participate in the crude oil market, especially for a long-term player, is via oil ETFs. Crude oil ETFs are bought and sold the same way as many other shares in the stock market. When the price of oil fluctuates, this also influences the share prices of oil companies and, subsequently, the value of the ETF.
- Crude oil spread betting: Spread betting is common among UK brokers. It offers leveraged trading in crude oil, which means that only a percentage of the total trade value is required to open a position. You will not own the underlying asset as a trader, but you will be able to speculate on price movements.
- Crude oil CFDs: Contracts for difference (CFDs) are a type of financial derivative that, like spread betting, allow you to open a position on crude oil based on whether you believe the price will rise or fall. The main distinction between CFDs and spread betting is how they are taxed.
History of crude oil trading
The origin of the modern oil industry can be traced to Baku in 1837, where the first commercial oil refinery was established to distill oil into paraffin (used as lamp and heating oil). In terms of historical price action, crude oil hit its all-time high of $145.31 per barrel in July 2008. Its record low of $1.17 happened in February 1946.