Crude oil is the most widely traded commodity. Although the renewable energy movement is developing rapidly, oil remains one of the world’s key resources.
Before you start trading this instrument, learn about the product itself and how you can trade it. In this article, we introduce you to the oil market, the ways to invest in it, and how oil trading works.
Understanding Oil Trading
Perhaps the most significant advantage of oil trading is that demand is virtually guaranteed. There can be fluctuations in supply, and therefore in price.
Experienced traders with a high risk tolerance can achieve substantial profits with low capital outlays, especially with CFDs, but also with ETFs and futures contracts.
The biggest risk with commodities in general -and oil trading in particular- is extreme market volatility. The risk of loss is high, especially with derivatives, due to factors completely beyond the trader’s control.
Is it a high-risk trading instrument?
In the case of oil, traders often use the commodity to hedge against price movements.
This means that when the market moves in a given direction, the asset’s prices have tended to be stubborn and prevail, regardless of the high volatility and risk involved.
Commodities are resources, prices move constantly, and this is why they are a popular asset choice for portfolio diversification.
Commodities are often correlated with other asset classes, such as stocks.
Advantages and Disadvantages of Oil Trading
Oil is a popular product worldwide, but trading this instrument has its ups and downs.
Advantages
- Potential for huge profit margins in well exploration and discovery
- Opportunity for tax advantages
Disadvantages
- Promising profit margins due to high volatility also mean high risk
- Oil is not exempt from competition – renewable and nuclear resources are on the rise
Important: This is not investment advice. We present a series of common arguments for and against investing in this product. Please seek professional advice before making investment decisions.
3 Reasons to Trade Oil
Crude oil trading has several advantages over traditional stocks for certain classes of investors. Depending on your goals, trading this asset can be used as:
- Diversification: Adding oil commodities to an equity or fixed-income portfolio can reduce overall volatility, since there is a correlation variable between these asset classes.
- Inflation hedge: Commodities have intrinsic value independent of currency, meaning they retain their value even when the currency’s value falls in an inflationary environment. However, as of April 2020, this does not apply to oil, given the sudden drop in demand.
- Speculation: There are often wild swings in commodity prices; trading oil futures and derivatives can be a way to quickly profit from fluctuations in oil prices, which are notoriously volatile. It is not unusual for prices to move 5% or 10% in a single trading session.
How to Trade Oil with CFDs?
One of the easiest ways to start trading crude oil is with CFDs.
A “Contract for Difference,” or CFD, is a contract between a trader and a broker to exchange the difference in value between the moment a trade is entered and exited.
Standard leverage varies, although lower margins are more typical. Almost all CFD brokers offer the ability to speculate on futures contract prices, but contract sizes are usually much smaller than standard futures contracts. A crude oil CFD order can be as small as 25 barrels (depending on the broker) compared to 1,000 barrels for a standard futures contract.
A commission-free market, 24 hours a day
CFD trades are usually commission-free (the broker profits from the spread), and since there is no underlying ownership of the asset, there is no cost for selling or borrowing.
Oil is a 24-hour global market with constantly moving prices; it is an ideal vehicle for day traders to profit from rapid movement. It is also a highly liquid market, making it easy to enter or exit regardless of trade size.
How CFDs Work
Imagine you believe WTI is trending upward, so you decide to buy oil CFDs at the quoted price of $60.25 to $60.50 (the lower price is for a short contract, the higher for a long one).
To buy 10 long CFDs with a 3% margin, you would need $1,815 in your account ($60.50 [long price] x 10 [number of contracts] x 100 [number of barrels in a standard contract] x 0.03 [margin percentage]).
You would then “control” $60,500 worth of oil for your $1,815. That afternoon, you notice the price is $62.75, so you exit the trade, which is now worth $62,750.
How much was the profit? The profit was $2,250. Of course, if the price drops (moves against you), the degree of leverage will quickly work against you.
CFDs are complex financial products and are only recommended for experienced traders. If you trade CFDs, you will not own the oil itself.
Choosing a Broker: Over these years of experience, we have evaluated almost every broker in the industry, based on 5 key questions. If you want to learn how to choose a broker, visit the following tutorial: “How to Choose a Good Broker“
4 Factors for Understanding the Oil Market Every market has its distinctions, and this one is no different.
To make the most of your time and money trading this commodity, here are a few things to keep in mind:
-Technical indicators: When you start trading, charts can become key tools. It’s important to learn how to read a chart, and to do that, you need to understand what technical chart indicators are. Most importantly, you need to understand what these indicators mean, and how you can act on that knowledge to maximize your gains.
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-Brent and WTI: The two primary grades, and therefore the price benchmarks for crude oil, are Brent crude and West Texas Intermediate (WTI). The difference lies in where they come from – this automatically affects quality and availability. Brent crude comes from the North Sea oil fields, while WTI comes from oil fields in the United States.
–Trading psychology: When investing in any asset, it’s important to understand the psychology of most traders of that asset. By having a better sense of how oil traders act in certain situations, you’ll have a better handle on possible market movements.
-Supply and demand: As with any other commodity, supply and demand determine the price. You can stay up to date on global supply and demand metrics by following select media outlets.
Other ways to invest in this market
Oil trading requires a bit more consideration than other types of assets because there are many product options that can be used to enter the market, from pure oil derivatives to shares of oil and gas companies.
Each type has its advantages and its own set of complications. Most traders will choose one of the following options:
| Investment Method | Storage Costs | Security Costs | Expiration Date | Administration Costs | Leverage | Regulation |
|---|---|---|---|---|---|---|
| Buying Oil Barrels | YES | YES | NO | NO | NO | NO |
| CFDs | NO | NO | NO | NO | YES | YES |
| Futures | NO | NO | YES | NO | YES | YES |
| Options | NO | NO | YES | NO | YES | YES |
| ETFs | YES | YES | NO | YES | NO | YES |
| Stocks | NO | NO | NO | NO | YES | YES |
Oil Stocks
- Saudi Aramco – TADAWUL: 2222
- Exxon Mobil Corporation – NYSE: XOM
- Total S.A. – EPA: FP
- PetroChina (CNPC) – SHA: 601857
- Royal Dutch Shell Plc – AMS: RDSA
- Sinopec Corp – SHA: 600028
- British Petroleum Company plc (BP) – LON: BP
Oil ETFs
Exchange-traded funds, or ETFs, are one of the ways traders can gain a stake in the oil market.
Choose funds that track the performance of crude oil prices using futures contracts, or funds tied to a basket of oil company stocks. Some ETFs are leveraged.
The two types of leveraged oil ETFs are:
- Standard leveraged: offers a multiple of a particular performance index. Example of 3X leverage: a 1.5% increase in the market yields a 4.5% gain
- Inverse leveraged: offers a multiple of the opposite of a performance index. Example of 3X leverage: a 1.5% drop in the market yields a 4.5% gain.
Oil Futures
A futures contract is simply an agreement to buy or sell a quantity of the asset on a set date at a set price. These are standardized instruments for WTI and Brent; the standard contract is for 1,000 barrels, so a one-dollar move in price equals $1,000.
Here are a few important things to know about futures for this asset:
- Margin: Most crude oil futures contracts require around a 10% margin, which is quite high given the cost of 1,000 barrels. Although margins can change depending on volatility – don’t be surprised to get a margin call on futures contracts.
- Physical delivery: Futures contracts are settled through physical delivery of the crude oil, which is something most speculators don’t want to deal with, due to the logistical effort involved. It’s important to keep track of delivery and expiration dates, and either roll the position over to another month or close it out entirely before the contract expires. If you don’t, you could unexpectedly lose your money.
- Complexity: Futures trading is typically for professional traders due to the high cost and complexity involved. However, contracts for difference, or CFDs, provide a convenient way to “access” the futures market.
Oil Options
With options, a trader essentially pays a premium for the right (not the obligation) to buy or sell a defined quantity of the asset at a set price over a set period of time.
Crude oil options are the most actively traded energy derivative on the New York Mercantile Exchange (NYMEX), one of the largest derivatives markets in the world.
Despite their name, the underlying basis for these options is not crude oil itself, but futures contracts.
Options in the oil market, and in the commodities market in general, are more expensive due to the high volatility perceived in commodity prices.
Is the risk of oil trading worth it?
It’s not such a simple question to answer.
Whether oil trading is a risk worth taking will depend on the individual and how much they can afford to lose.
Trading has some great advantages, as well as pitfalls. However, it’s worth noting that the commodity is going through an especially unpredictable period, given the equally uncertain global state of affairs in 2026.
I am Raúl Canessa, the founder of Forexdominion.com. As an experienced Forex trader, my passion for investing and algorithmic trading has shaped my professional journey. Over the years, I have dedicated myself to refining my skills in the financial markets, allowing me to share my knowledge and insights through my platform. I am committed to helping others understand the world of trading and develop effective strategies for success in this exciting field.
