Crude Oil Explained: How to Trade Crude Oil

Date Modified: 07/01/2024

Among the many commodities available for trading, crude oil can be essential to traders and investors and is considered one of the world’s most important commodities. It is even referred to as “Black Gold,” and its prices can create volatility across the various market sectors.

So what is crude oil exactly, how can traders potentially benefit from its price movements, and what can it tell us about the broad energy commodities market?

An illustration of two oil barrels

What Is Crude Oil?

A known fossil fuel, crude oil is an underground source of liquid fuel that exists naturally and is extracted by drilling at depths below the surface. It is a natural mix of hydrocarbons and is considered a fossil fuel, which means that crude oil is made from the remains of animals and plants that existed millions of years ago.

In addition, it is important to note that crude oil is a nonrenewable energy source. This means that crude oil does not renew itself, and once used, it is not replaced naturally unlike wind or timber. This, in turn, may be what increases oil’s value as it is considered quite rare and a non-refundable and irreplaceable commodity.

What Is Crude Oil Used For?

Crude oil is a multifaceted energy commodity that can be used in various forms, some of which include transportation, as it can be used to fuel certain vehicles. In addition, it is mostly used to generate heat and electricity, but it can also be used to produce materials such as plastics, chemicals, fabrics, and even cosmetics and agricultural products like pesticides.

What Affects Oil Prices?

Oil prices, like other commodities prices, can be affected by a variety of factors. The most common ones are the following:

  • Supply and demand: oil prices, perhaps unsurprisingly, are affected by supply and demand. This means that, usually, when the demand for oil heightens and the supply decreases, then oil prices rise as well and vice versa. Take, for example, the events brought about by the Russia-Ukraine war which started in February 2022. This war brought with it sanctions on Russia, Europe’s biggest oil supplier, which, in turn, heightened the demand for oil while decreasing the supply. As a result, oil prices spiked ostensibly and reached an average of $101 per barrel in 2022 compared to $71 in 2021.
  • Economic changes: good periods of economic activity can lead to an increase in oil demand, hence driving its prices upward, while periods of economic turmoil and slowdown can do the opposite.
  • OPEC+: OPEC+, which is the abbreviation for “Organization of the Petroleum Exporting Countries,” is a body responsible for the exportation of oil and its decisions can have a direct effect on its prices.
  • Market sentiment: what traders and market participants believe or their perception of crude oil, can have a direct impact on trading activity and the oil market.
  • Geopolitics: geopolitical tensions can threaten various aspects of transportation, which can, in turn, disrupt trade flows by altering their volume and direction and causing sudden spikes in fuel prices. Ultimately, such conflicts can lead to the destabilization of transportation systems and crude oil prices.

Understanding Crude Oil

Part of understanding crude oil is that this commodity not only affects the commodity market but can also have rippling effects on other market sectors too. This is because, past price patterns show that usually crude oil and gasoline prices rise in tandem, which, therefore, increases the shipping and input costs for producers. It can also affect energy-related companies and affect the manufacturing sector.

How to Trade Crude Oil: Trading Oil Futures

Given crude oil’s importance to the overall economy, traders and investors alike may want to potentially benefit from its price movements, and they can do so through trading Oil Futures on Futures platforms like Plus500.

First and foremost, to trade oil Futures, it is important to understand what Futures are and how they work. To put it simply, Futures are derivative contracts between two parties (a buyer and a seller) that obligate them to buy or sell a certain underlying asset (like crude oil) for a preset time, quantity, and price at a future date. To read more about Futures contracts, you can refer to our article - “What Are Futures and How Do You Trade Them?”

Secondly, in order to determine whether or not crude oil Futures are a suitable option for you, here are some of the potential aspects you should consider:

  • Availability: crude oil Futures are traded 24 hours a day 6 days a week hence they are more available to trade than other markets.
  • Leverage: crude oil Futures are leveraged. While leverage can magnify traders’ gains, it is also a double-edged sword, as it can also increase their losses. To gain a better understanding of how leveraged trading works, read our article “What Is Leverage in Trading: The Pros and Cons.”
  • Expiry: Futures have expiration dates, and as these dates draw nearer, the contracts in question can often lose their traction.
  • Hedging: futures contracts can be a good way to hedge against price fluctuations.
  • Delivery: Crude Oil Futures are deliverable contracts. This means that the buyer and seller are obligated to deliver what the contract states at expiration.

Furthermore, it is also worth noting that crude oil can be traded by investing in oil-related stocks, trading CFDs, or purchasing physical oil barrels.

Where Is Oil Traded?

Oil futures are traded on the New York Mercantile Exchange (NYMEX), which is one of the biggest physical commodities Futures exchanges. To learn more about the NYMEX and other Futures exchanges, read our article “Chicago Mercantile Exchange (CME): Explained.”

What Are the Largest Oil Producing Countries

According to the Energy Information Administration (EIA), as of 2022, the largest oil-producing countries are the USA, Saudi Arabia, Russia, Canada, China, Iraq, UAE, and Brazil. These countries can have a direct effect on prices through their decision-making policies and their political or geographical decisions.

All in all, crude oil was and continues to be one of the most traded and important commodities in the world, and therefore, traders and investors may find themselves drawn to it. While there are many ways to trade crude oil, trading oil Futures with a regulated provider, like Plus500, allows traders access to the oil market without having to have ownership of the underlying asset. This means that traders can potentially benefit from oil prices without owning them, all while gaining access to a wide and rich market that also trades for most days in the week. To read more about the different types of Futures contracts read our article “What Are the Different Types of Futures?”.