Oil trading explained: how to trade oil

Oil is a popular commodity to trade due to its high liquidity and volatility. It can be bought and sold at its market value (oil spot price and futures) or through speculation in the form of spread bets and CFDs, as it presents a number of trading opportunities.

An extremely valuable resource, it can be refined into everyday products, such as gasoline, diesel and other petrochemicals, which are consistently in high demand. It is also the world’s primary energy source. Crude oil is used for manufacturing everything from plastics to petroleum, cosmetics to cars, and fabrics to pharmaceuticals. In a modern world, there is an increasing human population and consumption of agricultural and recreational goods, which results in a greater need for energy.

Speculating on the energy markets can be a risky move. Where supply and demand are constantly changing, so is the price of oil. However, it’s a liquid commodity, meaning that it can be traded in large volumes and boasts a relatively tight spread of around 3.0 points on average.

Each type depends on the geographic location of the oil field and the characteristics of the blend itself. While there are hundreds traded on the global market, two primary blends serve as global benchmarks for energy prices: Brent and West Texas Intermediate (WTI).

According to the most recent report from the US Energy Information Administration (EIA), the 10 biggest oil producers in the world are as follows:

Prices are highly volatile and heavily influenced by supply, demand and market sentiment​. There are a number of factors that affect trading prices in the UK, including the following:

The Organisation of Petroleum Exporting Countries (OPEC) is an organisation of 13 countries that produce and export around 40% of the world’s oil supply. It sets production targets based on global supply and demand, and because of its large market share, it has a significant influence on prices. According to its website, OPEC countries account for almost 80% of the world’s oil reserves, with the largest amounts in Venezuela, Saudi Arabia, Iran, Iraq, Kuwait, UAE, Libya, and Nigeria. Other countries on the top 10 list that aren’t part of the organisation include Canada and Russia.

Historically, oil prices have gone up in times when OPEC production levels were reduced. Therefore, traders often use the group’s production targets as an indicator of the tightness of the energy markets when output is increased or decreased.

Tensions between OPEC and non-members can cause oil prices to change. For example, during the Covid-19 pandemic in 2020, the organisation’s allies agreed to cut production rates as the commodity’s value started to drop. However, Russia (which is not a part of the group) rejected the agreement, leading Saudi Arabia to initiate a price war, causing it to plummet even further.

Spread betting​ is our most popular derivative product that allows traders to speculate on price movements for a wide selection of commodities, including both Brent and West Texas blends, rather than owning the underlying asset. It’s a leveraged product, meaning that only a percentage of the full trade value is needed as a deposit to open a position.

Crude oil spread betting can be a risky process as the commodities market is particularly volatile, especially during times of economic crisis or instability. It’s an attractive product in the UK to many traders, as it allows you to trade tax-free*. Despite this, the use of leverage can bring many risks also, as it helps to magnify profits if you placed a successful trade but equally, it can increase losses if the markets move against you.

Contracts for difference (CFDs)​ are a type of financial derivative that work in a similar way to spread betting and allow you to open a position on crude based on whether you think the commodity's price will rise or fall. The main difference between the two products lies in tax treatment, so learn more about how to trade oil CFDs​.

So, what’s the difference between spot and futures prices?

Crude oil is one of the most liquid commodities within the market, which means that it can be traded in large volumes and there is extensive data to analyse. In order to fully understand the market and be able to make future predictions, traders should perform some research of their own, including technical and fundamental analysis, and any other research they see fit. This will give an insight into market trends and also help to build knowledge of the asset itself.

For example, fundamental analysis is useful in evaluating the value of the energy, through company financial statements, news releases and the general economic stability of a region that you are trading in. For example, if there is a news announcement of an oil spill or cut in production, this will affect the commodity’s price and any related companies, which will need to be factored into your trading strategy. This is considered fundamental analysis​.

Studying price charts, graphs and technical indicators to extract numerical information is all part of technical analysis​, which usually is the second stage of the process. However, both strategies are needed in collaboration, as the commodity can be highly volatile and so it benefits to use a comprehensive perspective.

Sign up for an account to spread bet or trade CFDs on our commodity trading platform, Next Generation. We offer exclusive features for live account holders, such as a trading forum and access to unlimited technical analysis tools. This will also grant you access to a vast number of oil stocks, such as BP, Chevron, ExxonMobil, and Royal Dutch Shell, as well as related exchange-traded funds (ETFs).

With CMC Markets, it’s possible to trade on a number of energies via spread betting and CFDs using a single position through our Energy Index​. Trading on commodity indices gives you exposure to not only one commodity but a collection within the same sector, including Brent Crude, West Texas Crude, Natural Gas, Heating Oil, Gasoline and Low Sulphur Gasoil. This also helps to diversify your trading portfolio.