Introduction

Crude oil falls under the “Energy Products” asset category. Energy products are commodities and just like other commodities, they are priced in US dollars. Crude oil is the most popular energy product in a commodity class that also features heating oil and natural gas.

Crude Oil has several derivative products, some of which are also traded as commodities. Common crude derivatives include heating oil and various petroleum products such as premium motor spirit (PMS, petrol or gasoline), automotive gas oil (diesel) and aviation fuel.

There is a large global demand for crude oil, and it is very sensitive to supply excess and shortfalls. Crude oil derivatives are used in many industries as well in nearly every facet of human life. This is why crude oil has been, and will be for a long time, be a very volatile asset in the commodity market.

In the financial markets, crude oil is traded in two forms: (US crude or Western Texas Intermediate) as well as Brent crude (UK crude). Both are forms of light sweet crude, but the Brent crude has a higher density and higher sulphur content than the WTI variety.

Did You Know that Oil can be Traded in 5 Major Ways?

  1. Crude oil is traded in the following ways: spot contracts, forwards, futures, options, non-deliverable forwards (NDFs) and as CFD contracts.
  2. Trading crude oil as futures and options requires a lot of capital. This makes it very expensive and out of reach of many retail clients. This is why crude oil trading is offered as a Contracts-for-Difference (CFD) asset, with contract specifications that have made it more affordable for retail traders to trade the asset.
  3. Light sweet crude is also known on the trading platforms as US Crude, represented by the Western Texas Intermediate (WTI). This is traded on the New York Mercantile Exchange (NYMEX).
  4. Brent crude is also known as UK crude. It is traded on the Intercontinental Exchange (ICE) in London.
  5. Oil CFDs – Oil can also be traded on online platforms as Contracts for Difference (CFD) assets. This allows traders to trade the contracts based on the underlying oil asset, without having to exchange or own the physical asset. This form of trading largely attracts retail traders, and this is what will be discussed in this guide.

Some Key Points About Oil CFD Trading

Oil CFD trading has some distinct features that serve to set it apart from other forms of trading such as forex or stocks trading. What are some of these key points?

  • Fundamental Analysis

The fundamentals of crude oil border around the forces that deal with the demand and supply of the product. One of the important fundamentals of crude oil which is actually listed on the economic news calendar is the Crude Oil Inventories report. Released every Wednesday at 10.30am, this report presents a picture of the global supply of oil. Lower inventory numbers are indicative of a supply shortfall, and a rise in inventory is indicative of a supply glut. However, these numbers are not usually traded in isolation, but take into account the supply situations in previous months. Crude oil prices are also affected by factors on the political or economic front which will impact supply. Some of these include:

1- War in countries that account for a large chunk of the world’s production. We saw this in 1991 during the 1st Gulf War and also in 2011 during the Libyan Civil War where crude oil prices topped $140 a barrel.

2- Economic sanctions on producing countries. Sanctions on Iran caused oil prices to gain from its 2014 lows of just under $30 per barrel to as high as $70 per barrel

3- Cut in production quota (aka Supply) from members of the Organization of Petroleum Exporting Countries (OPEC). OPEC meeting to discuss production quotas is one of the most followed economic events in the world.

4- A new fundamental influence has emerged in the last few years, with the US now a major producer of shale oil. With the discovery of shale oil in the US and the lifting of the embargo on oil exports, the US is now the biggest producer of crude oil in the world. This has impacted the correlation between the US Dollar and crude oil.

5- The Gross Domestic Product of countries that are key players in the demand and supply side of the crude oil equation, as well as global economic outlook, will impact crude prices. A depressed global economy will lead to lower demand and falling prices. The same effect is seen when major demand outposts for crude oil such as China, experience low GDP figures, which is a sign of reduced economic growth.

6- The weather also plays a role in crude oil prices, though not by much. This only happens when major hurricanes affect production of US oil in the Gulf of Mexico area. Furthermore, very cold winters increase demand for heating oil, a derivative of crude oil. This in turn will impact the demand for crude oil.

  • Technical Analysis

As with other traded assets, crude oil prices are represented on charts of different time frames. Technical analysis is all about price forecasting and trading, therefore traders can use technical analysis to trade both UK Oil and US Oil CFDs. An example of how to use technical analysis for price forecasting and timing of entries will be shown.

  • Leverage/Margin Requirements
  • Contract Specifications

Individual brokers have contract specifications for the trading of oil CFDs. See the discussion of the brokers listed in this article for more information on this.

Best Oil CFD Trading Providers 2019

Here are the best Oil CFD brokers of 2019. This list presents brokers who present oil CFDs for trading on their platforms, with plenty of additional benefits. These brokers are as follows:

AvaTrade
You can trade oil using the Webtrader, the mobile app (AvaTradeGo) as well as the Webtrader. AvaOptions is a platform which allows traders who are well versed in options trading to trade crude oil options. However, this platform is for intermediate-level and advanced traders. Beginners will need to stay away from crude oil options until they are better skilled at it.

Crude oil is traded as one asset: CrudeOIL. The contract specifications for the trading of crude oil on AvaTrade are displayed in this snapshot:

Take note: leverage for trading crude oil is 1:10 (EU only) or up to 1:400 (Global offering). Other trading conditions are basically the same on both the EU, Australian and Global brands of AvaTrade. Therefore, EU clients of AvaTrade will need significantly more capital than clients who trade with the Global brand.

Pros

  • Avatrade is regulated in several jurisdictions, offering a safe trading environment for clients.
  • Avatrade offers a comprehensive trader education suite.
  • Various tools and add-ons such as Autochartist and a Trading Position Calculator for risk management can be adapted to enable more efficient and less risky oil CFD trading.
  • The MT4 DupliTrade allows for copying of trades of successful oil traders.
  • Trade oil on your desktop (MT4), on the web (Webtrader) or on mobile (AvaTradeGo).

Cons

  • AvaTrade’s MT4 tends to have many requotes, which can increase the cost of trading oil.
  • No negative balance protection for traders outside the EU.
  • Oil is not available for trading on the MT5. Those who operate MT5 accounts must open new MT4 accounts to be able to trade oil.

How to Trade Crude Oil

Unlike most other assets traded in the financial markets, crude oil has the distinction of being the only asset which has two forms in which it is traded. On AvaTrader, you will be able to trade a combined contrct.

Trading crude oil as a CFD means that you will only trade the contract specified by your platform, but you will not own the underlying asset. This gives you the ability to trade both ways: aiming to profit from rising prices using long orders, or aiming to profit from falling prices using sell orders.

Crude oil is a very volatile asset and prices tend to be quite choppy on short term charts. It is usually advisable to trade off the daily charts, after finding the long term trend of the asset on the monthly and weekly charts. In other words, application of multiple time frame analysis is a safe way to trade crude oil. Attempting to trade off short term charts such as the hourly charts usually does not end well because prices move too fast, and price ranges are very wide as well.

To trade oil as a CFD, you will have to open a trading account that enables you to trade crude oil, with any of the regulated brokers featured in this article. After account verification, you will then need to deposit funds to start trading. Oil CFD trading usually requires significantly more funds than trading forex or other CFDs because of the larger margin requirements. You must ensure that your account is well funded not just to cater to the margin requirements established by the broker, but also to withstand the volatility of the oil CFD assets.

Crude Oil Trading Strategy

Prices of crude oil tend to follow trends, therefore the strategy that will be described will indicate how to trade crude oil using trendlines as well as support and resistance points. Historical support and resistance points are very important to the trading strategy, as they can be used for price projections. In other words, they can be used to mark out areas where stop loss and profit targets can be set.

The snapshot below is a daily chart for the US Oil asset. The chart has been compressed to reveal past support and resistance areas. These are going to be relevant in the execution of the trend-following strategy.

We can see that from January 2019, prices of US Oil have been in an uptrend. An uptrend is marked by higher highs and lower lows. In an uptrend, the reaction lows can be connected with a trendline to form a support line on which long trades can be placed. Remember that we always have to trade in the direction of the trend.

In tracing a trendline, the following principles must be adhered to:

  1. A valid up trendline must be traced across two reaction lows. This creates a tentative trendline.
  2. A third reaction low must make contact with this trendline to validate it. At this stage, the trendline is now a valid trendline.
  3. Only when the third reaction low has made contact with the trendline without closing below it, can a long trade be initiated at the open of the next candle.
  4. The more the price bounces on this trendline without breaking it, the stronger the trendline will be as a support level.
  5. Buying volumes should increase in order to validate this trend move.

Based on these parameters, the valid entry and exit points on this chart are shown below:

Points 1 and 2 represent the reaction lows on which the tentative up trendline was drawn. Point 3 represents the reaction low which validates the trendline. Thereafter, the long trade was setup at the $59.42 price level. The Take Profit point was set at the channel line (also called return line), where it was found that price had earlier found support in May and June 2018. The red line would therefore serve as the new resistance (role reversal), and would therefore mark a valid trade exit point. This view is also supported by the fact that the volumes are decreasing, which signifies that the uptrend is weakening.

The same principles will work in a downtrending market. The difference here is that the trendline is applied to the reaction peaks, which will serve as the points on which a down trendline can be traced in order to initiate short trades.

FAQs

What is an Oil CFD Contract?

An oil CFD contract is a trade contract between you (the trader) and the dealer/broker to buy or sell the listed oil asset on your platform without actually owning or exchanging physical oil itself. Oil CFDs can be traded on the AvaTrade platform  as “CrudeOIL”.

I tried to trade oil and the platform said the market is closed. What are the trading hours within which I can trade oil??

Oil CFD trading is only available when the CME (the market where physical oil is traded) is open. The oil markets are open 23 hours each day from 6pm EST on Sunday to 5pm EST on Friday. There is a one hour break between 4.55pm – 6pm EST every day. However, some platforms can allow you place orders for new trades or make amendments to existing orders within that time.

Do oil contracts expire, or can I maintain a position until when I want to close it?

Oil CFD contracts typically expire and rollover. However AvaTrade have implemented a system whereby the old contract price is swapped with the new one before the old contract expires, eventually harmonizing the prices between both. This is done to avoid the trade interruptions that used to occur in the past when swapping an old contract with a new one.

Can I trade crude oil on the MT5 platform of AvaTrade?

Presently, you can only trade crude oil on the MT4 platform of AvaTrade (desktop and webtrader). You cannot trade crude oil on the MT5 platform at the moment.

Can I use my forex VPS on my MT4 broker?

The MT4 platform is suitably built for use with a forex Virtual Private Server (VPS). Some MT4 brokers also provide free access to a forex VPS for traders who have funded live accounts.

What happens to my positions during public holidays or broker-observed bank holidays?

All active positions will remain open and will be rolled over to the next trading day.

Are Oil CFDs traded at the interbank FX market?

No. Oil CFDs are Over-the-Counter (OTC) assets which are priced at the broker’s dealing desk. Trade executions are also fulfilled at the level of the broker’s dealing desk and do not get to the interbank market.

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