Crude oil is one of the many raw materials in which you can invest your capital in the hope that this way you will be able to earn a lot of money. There is no shortage of traders who are willing to trade the so-called black gold. Investing in oil can not only be profitable, but also exciting due to the nature of the asset and the behavior of its exchange rates. It is also difficult and demanding trading at the same time. So what should you know at the beginning of your adventure with investing in oil? What does trading look like and is it really profitable?
Understanding Crude Oil
Crude oil is, next to natural gas and coal, the basic energy raw material, which is used on a large scale by almost all global economies. Its use is necessary for the functioning of a number of industries, which is why it is still considered a valuable and desirable commodity. For more than a decade, oil trading has also been profitable – with the onset of the global economic crisis, the price per barrel fell dramatically, which gave traders much more room for maneuver in terms of investment. For example, at the beginning of 2008, the price of crude oil was around USD 150 per barrel. Today, you have to pay just over $40. And although oil quotations have managed to stabilize more or less over the past twelve years, many traders see this commodity as an opportunity to earn a lot of money, paying attention primarily to the factors that affect its price.
Types of crude oil
Before you even decide to invest your capital in oil, it is worth realizing that there are several types of oil. The most popular of them are:
- – Brent oil – produced in the North Sea. Its deposits are located between Norway and the United Kingdom. It is considered to be a high-quality oil, primarily due to its low sulfur content and relatively low weight.
- – WTI (West Texas Intermediate) crude oil – oil produced in Cushing, Oklahoma, United States. Highly valued, widely considered to be of very high quality.
- – Ural oil – Russian oil, which consists of two varieties – heavy and acidic oil extracted in the Urals, and slightly better and lighter from Siberia.
- – OPEC (reference basket) – in other words, it is a weighted average of oil prices of OPEC members. It includes oil extracted in Indonesia, Algeria, Iran, Iraq, Qatar, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela.
Where did the above division come from? It is important to realize that each of the above types of oil has different chemical properties. The lighter the raw material and the lower the sulphur content, the more important it is for industry and energy.
What affects the price of oil?
There are at least several factors that determine the price of oil. First of all – the dollar exchange rate. Due to the fact that the raw material is priced in this currency, a possible decline in its quotations causes an increase in the price of “black gold” and vice versa. Secondly, the aforementioned OPEC, i.e. the Organization of the Petroleum Exporting Countries, has the ability to increase or decrease production depending on the current economic situation. There are also external factors, such as this year’s pandemic, which overlapped with the surplus of oil reserves, which led to a significant drop in oil prices. Oil prices can also change seasonally, for example due to weather conditions or natural disasters. To this should be added possible armed conflicts or economic situations of the countries in which the raw material is extracted. All these elements should be taken into account when analyzing the price of oil and deciding whether to buy or sell it.
How to trade oil?
Of course, oil trading is not based on its physical collection and subsequent distribution. In the era of the ubiquitous Internet, investing in this and other raw materials is primarily done online. Most often, oil is traded through CFDs, also known as contracts for difference. In a nutshell – operations on such instruments consist of speculating on the prices of the underlying assets. In the contract, both parties assume that the seller will pay the difference between the current value of the specified asset and its value on the date of the contract. In such an investment, the trader never owns the underlying asset, but only predicts whether its rate will rise or fall over a certain period of time, and on this basis makes operations that he believes will bring him the most profit.
Features of oil trading
Trading based on crude oil is demanding, mainly due to quite high volatility of the commodity price. This has its good and bad sides – for some it is an opportunity to get quick and a lot of money, and for others it is a huge trap that is easy to fall into and thus lose all the accumulated capital.
It should also be noted that the price of crude oil depends on many factors. In order to make a complete analysis of the market situation, it is necessary to take into account all data and information that may affect the price of the raw material. It may be necessary to follow news from the world of politics, economics, trading, and even checking weather forecasts.
Oil trading requires knowledge and experience. As in any other type of trading, it is fraught with the risk of losing money. It is important that investors operating in this field are fully aware of the risks resulting from irresponsible trading. It is worth adding that disciplined action based on systematic analyses is very important.