US crude oil trading explained: How to trade crude oil

What is crude oil trading?

Crude oil trading is the buying and selling of different types of oil and oil-linked assets to speculate on price fluctuations of the commodity.

Read on if you’re interested in learning how to invest in crude oil.

How does crude oil trading work?

Crude oil, along with its derivatives, is considered one of the most widely-traded commodities globally. That’s hardly surprising, as oil is used in almost every sector of the economy.

Crude oil is traded via futures contracts, which are used by producers, refiners and large consumers as part of a hedging strategy, and by traders, investment funds and individuals to speculate on price movements.

There are hundreds of crude oil grades, based on their qualities, such as sulphur, nitrogen and metal content, density and viscosity.

There are two major oil price benchmarks – Brent crude oil, the global benchmark, and West Texas Intermediate (WTI), the benchmark for US crude oil trading.

Brent pricing is based on light, sweet crude oil extracted from oil fields in the North Sea. Two-thirds of global crude oil trade is priced at a differential to Brent. WTI prices crude oil that flows through pipelines to a delivery point in Cushing, Oklahoma. Most crude oil grades produced in the US and Canada are priced at a differential to WTI.

WTI is lighter and sweeter than Brent, but trades at a discount due to oil shale production growth in the US and Canada. The WTI market is the most liquid crude oil market.

Understanding crude oil

Crude oil is a commodity extracted along with natural gas by drilling in oil fields. It is then refined and processed into oil products including gasoline, liquefied petroleum gas (LPG), jet fuel and kerosene.

The Organisation of the Petroleum Exporting Countries (OPEC), which includes countries with the world’s largest crude oil and natural gas reserves, was founded in 1960. OPEC has been a strong influence on global oil prices, as it controls the supply. An increase in OPEC production can push down crude oil prices, while production cuts can drive prices higher.

Oil shale production in the US has made the country a net exporter of crude oil since November 2019, increasing its influence on the global market and moderating OPEC’s impact.

What are the different types of crude oil?

Crude oil is a liquid mixture of hydrocarbons formed from plant and animal fossils over centuries. It is found in porous, underground rocks, including beneath the ocean floor. 

Crude oil forms with different qualities, depending on its geographical location. This means that crude oil commodity traders are concerned with the type and geographic origin of the crude oil they trade.

There are six types of crude oil:

• Light/sweet

• Light/sour

• Medium/sweet

• Medium/sour

• Heavy/sweet

• Heavy/sour

Light crude oils require less processing. They are used to make refined products like petrol, diesel and jet fuel. Heavy crude oils are used to make industrial products such as plastics and asphalt. 

Medium crude oils have a higher sulphur content than light oils, but less than heavy oils. Sour crude oil has higher sulphur and carbon content than light crude, so requires more costly refining.

What moves crude oil prices?

As with other commodity markets, crude oil prices are largely driven by supply and demand dynamics, production costs and investor sentiment. 

Supply and demand

When crude oil production rises, prices fall if there is not enough demand to absorb the additional supply. Conversely, if production falls and the supply-demand balance tightens, prices rise. A rise in demand, whether seasonal or because of a long-term trend, can also support higher prices.

Strength of US dollar

As crude oil is traded in US dollars (USD), the value of the dollar can affect demand from countries where buyers use other currencies.

Geopolitical factors

Political unrest, strike action or war can disrupt crude oil production and reduce supply. International sanctions on a country can reduce the availability of its oil on the market, thereby reducing global supply. 

A price war between Russia and Saudi Arabia – the world’s two largest oil producers – drove price volatility in the early 2020. And Russia’s invasion of Ukraine has driven the direction of the market in 2022.

Market speculation

If the market expects a large swing in demand or supply, it can attract traders to speculate on prices by trading crude oil contracts.

New energy sources

Over the long term, demand for crude oil is expected to decline as countries move towards low-carbon energy sources to address climate change. Demand for petrol and diesel could fall as more drivers make the switch to electric vehicles.

Global oil production

OPEC and, increasingly, US policy on crude oil production have an impact on global supply and hence the price direction. 

State of the global economy

Economic activity is a primary driver for crude oil prices, as during periods of growth, manufacturers, businesses and individuals consume more energy. During economic slowdowns and recessions, on the other hand, crude oil demand falls, pulling prices lower.

How to trade crude oil

Are you interested in learning how to trade crude oil? There are a number of ways, depending on your preferred approach and trading strategy.

Spot trading

The spot oil market involves trading large physical cargoes for immediate delivery in one-off transactions. These can be on exchanges or directly between two counterparties on the over-the-counter (OTC) market. Traders use spot prices to set levels at which futures contracts trade.

Futures

Aside from the companies that buy and sell physical oil cargoes, most crude oil trading is done using futures contracts. 

With futures contracts, traders agree to buy or sell a specified amount of oil on a set date in the future. Standard futures contracts are for 1,000 barrels of oil. Rather than taking delivery of oil barrels when a contract expires, traders can roll them forward to the next month. 

Futures trade on commodities exchanges such as the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Contracts for difference

Contracts for difference (CFDs) are one of the most popular ways to gain exposure to crude oil markets. A CFD is a contract between a trader and a broker, which allows the trader to speculate on the price difference between opening and closing a trade. 

CFDs enable you to speculate on both crude oil prices on both spot and futures markets without having to take delivery. Besides, the contract sizes are often much smaller than standard futures contracts. For example, a US crude oil CFD order can be for 25 barrels, instead of a standard futures contract for 1,000 barrels.

Options

Options contracts are based on futures but they give traders the option, rather than obligation, to buy or sell oil on a specified future date. Like futures, options trade on commodities exchanges. However, individual investors tend to trade them directly through brokers or indirectly through exchange traded funds (ETFs) that contain future contracts.

Exchange-traded funds (ETFs)

ETFs are a convenient way for investors to invest in crude oil without having to trade futures. ETF managers buy and sell futures contracts in an attempt to track oil prices. Crude oil ETFs tend to be used for short-term price speculation, as they often lose value when rolling futures contracts forward as they expire.

Stocks

If you want to gain indirect exposure to crude oil prices, you can trade crude oil stocks by choosing shares of companies that extract, refine and trade crude oil. This can provide some stability as oil company share prices can be less volatile than crude oil spot and futures prices. 

While share prices are influenced by oil prices, they also depend on how well the companies are managed. One of the advantages of investing in oil companies is that they can generate large amounts of cash when prices are high and pay higher dividends than other stocks. 

However, remember, all investment contains risk. You should always conduct your own due diligence, looking at the latest news and company’s fundamentals before trading. 

What is a crude oil trading strategy?

Before you start trading, you should have a clear crude oil trading strategy to determine when to buy and sell, to potentially secure your profits and limit losses. 

As crude oil is highly sensitive to geopolitics, it could be important to use fundamental analysis as well as technical analysis to identify trading signals. Here are some trading strategies that may be suitable for investing in crude oil.

Buy and hold

Much like ‘buy and hold’ strategy in investing, when investors are holding the asset until the price rises, traders can analyse supply and demand to decide when to buy crude oil. They can hold the position open until the price rises enough to sell and take any potential profit. Note that all trading contains risk and you can lose your money if the price moves against your position. 

Technical analysis

Crude oil traders can use technical indicators such as moving averages (MA) and oscillators on price charts to help predict how the price could move. Used alongside fundamental analysis, traders use technical analysis tools to decide when to buy and sell.

Swing trading

Swing traders aim to profit from short-term price swings by buying crude oil futures when the price is trending higher and selling when the price is on a downward trend. Note that swing trading is a risky strategy as you can lose your money if the price moves against your position. 

Spread trading

Spread traders attempt to profit from differences in the prices for futures contracts with different expiry dates. If they expect prices to move, they buy a futures contract for one month and sell a contract for another month, profiting from the price spread between the two contracts. Note that there is always the risk to lose money if the price moves against your position. 

Intraday trading

Day trading is an extremely short-term strategy that aims to speculate on price fluctuations on days when there is high volatility in crude oil markets. Traders open and close positions in the same trading session. This could be effective when geopolitical events or major economic data announcements drive rapid price swings.

Scalping

Scalping is an immediate strategy in which traders open and close positions within seconds or minutes to speculate on price volatility. Scalp traders use technical analysis tools to identify bullish and bearish trends and use indicators for precise entry and exit points.

Trend trading

Trend trading, also known as position trading, uses technical analysis to identify a price trend and open up a long or short position until technical indicators point to the trend coming to an end. The trader will then close the position to take profits before the price changes direction, or they would lose money if the price moves against their position.

How to trade crude oil CFDs

CFDs provide the option to trade crude oil in both directions. Whether you have a positive or negative view of the crude oil forecast and predictions, you can try to speculate on the price direction either upwards or downward.

Are you looking into how to trade crude oil CFDs? Sign up for an account with a CFD provider like Capital.com. You can trade crude oil along with stocks, cryptocurrencies, forex and indices in the same trading account.

Follow these simple steps to get started:

1. Create and login to your trading account

2. Choose the instrument of your interest (for example, WTI crude oil CFDs) 

3. Use your preferred trading strategy to identify buy and sell signals

4. Open your first trade and set a stop loss or a guaranteed stop loss to manage risk

5. Monitor your trade using technical and fundamental analysis based on your strategy

6. Close your position when your trading strategy indicates

Pros and cons of trading crude oil CFDs

Hedging allows you to open a position to offset a potential loss on other assets in your portfolio. 

The crude oil market is highly volatile, which attracts traders looking to book short-term profits. Traders can buy and sell crude oil as a hedge against inflation eroding their purchasing power. Note that all trading contains risk of loss.

Leverage can maximise gains but similarly can magnify the size of losses. You can trade CFDs on margin, meaning you can gain greater exposure for your initial capital by putting up only a fraction of the value of a trade and essentially borrowing the rest from your broker. 

The 10% margin offered by Capital.com means you have to deposit only 10% of the value of the trade you want to open, and the rest is covered by your CFD provider. For example, if you wanted to place a trade for $1,000 worth of crude oil CFDs with a 10% margin, you would need only $100 as initial capital to open the trade.

However, leverage multiplies the size of losses if the price moves against your position. It is important to do your own research and understand how leverage works before you start trading.

Why trade crude oil with Capital.com?

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. If a trader makes decisions based on biases, the innovative SmartFeed offers a range of materials to put him or her back on the right track. 

The neural network analyses in-app behaviour and recommends videos and articles that could help polish your trading strategy. This will help you to refine your approach when you trade crude oil CFDs.

Trading on margin: Thanks to margin trading, Capital.com provides you with the option to trade crude oil CFDs and other top-traded commodities, even with a limited amount of funds in your account.  Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified.

Trading the difference: By trading crude oil CFDs, you don’t buy the underlying asset itself. You only speculate on the rise or fall of the asset price. CFD trading is no different from traditional trading in terms of its associated strategies. A CFD trader can go short or long, set stop loss and limit-orders, and apply trading scenarios that align with his or her objectives.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS, and Android.

Crude oil trading hours

Crude oil trading hours are longer than stock market hours. CME Globex provides electronic trading 24 hours a day, six days a week, Sunday to Friday, 18:00 to 17:00, with a 60-minute break each day.

If you choose to trade CFDs, you can follow the WTI crude oil prices live in US dollars with the comprehensive WTI crude oil price chart on Capital.com, and buy or sell the commodity during the following trading hours:

Monday to Thursday, 00:00 to 21:00 and 22:05 to 00:00

Friday, 00:00 to 21:00

Sunday, 22:05 to 00:00

FAQs