Oil

Oil trading is a dynamic industry that is popular among UK investors. Understanding the basics of oil trading and the key factors that influence the price of this commodity is essential for traders looking to make a profit. This 101 introduction to oil trading will cover the major players in the market, the influences on prices, and the risks and opportunities involved. We also rank the top oil brokers in 2024.

What Is Oil Trading?

From global hedge funds to retail traders, every day thousands of individuals and companies use spot trading or derivatives to buy and sell crude oil and other petroleum products to make a profit.

Success in oil trading depends on the ability to make accurate price predictions, which in turn comes down to various factors from understanding supply and demand to responding to important news events and conducting technical analysis.

In the UK, investors can access the oil trading market from several local exchanges as well as global brokers. A few examples include the London International Financial Futures and Options Exchange (LIFFE), which is a subsidiary of the Intercontinental Exchange (ICE) and offers futures and options contracts on Brent crude oil, and the London Metal Exchange (LME) which offers contracts on Brent crude oil, WTI crude oil, and gas oil. As for global exchanges that UK investors can trade in, the Dubai Mercantile Exchange (DME) and Singapore Exchange (SGX) offer futures contracts on Brent crude oil, WTI crude oil, and Oman crude oil.

Several top online brokers also facilitate oil trading through products like CFDs, which offer a straightforward way to speculate on the price of the commodity without taking ownership of barrels of oil. We explain how oil CFD contracts work in more detail further below.

Oil Price Chart

Why Trade Oil?

Commodities markets have their own unique attributes, with many factors influencing prices. Traders look to oil for many reasons, from simple speculation on price movements to using oil trading as a form of risk management (hedging). But two of the key factors that attract traders are the high volatility of oil prices and the high liquidity of the market.

Because oil is used as a raw material in the production of countless goods, as well as being the world’s primary energy source, it is almost always possible to fill buy and sell orders on this commodity. At the same time, there are multiple complex factors affecting oil prices, which have been known to swing dramatically between extremes. This volatility is a double-edged sword, as it can lead to large profits, but also unexpectedly large losses.

Due to the risk associated with trading volatile products, investors can sign up with oil brokers that are regulated by the Financial Conduct Authority (FCA), and the oil market itself is rigorously regulated by the Department of Energy and Climate Change (DECC), the Oil and Gas Authority (OGA), and the Oil Spill Prevention and Response Advisory Group (OSPRAG). Together, these bodies ensure traders’ and market participants’ rights and data are protected, and that the oil assets they trade in are secure.

History Of Oil Trading

Oil trading has been prevalent in the UK for more than 50 years. Between the 1970s and the 2000s, oil prices have seen large spikes and drops, often due to broader geopolitical events and crises. The early 70s, for example, saw oil prices skyrocket after the Organization of Arab Petroleum Exporting Countries (OAPEC), including the world’s largest oil producers, declared an oil embargo on a host of Western countries.

In recent years, the oil trading market has also been affected by the emergence of new technologies such as renewable energy. Additionally, there was a decrease in the global demand for oil due to the COVID-19 pandemic. These events, primarily the pandemic, led to a negative impact on oil prices, which reached a historic low in April 2020.

Factors That Influence The Price Of Oil

Oil Producing Countries

When trading oil, it is important to track the major players in the market and how their activities may affect the price of crude oil. This is particularly true because the costs of oil extraction vary greatly among regions. If Saudi Arabia and the major oil producers in the Middle East, where oil extraction is the cheapest in the world, decide to increase production, it quickly drives oil prices down, sometimes making production elsewhere unviable.

Conversely, if the major producers reduce the flow of oil, prices will tend to rise and oil supplies may come from a more diverse list of suppliers.

Economic Development

Economic growth is another important factor that can have a significant impact on the price of oil. As economies grow, the demand for oil increases, leading to higher prices.

The US is a good example of this – as the US is one of the largest consumers of oil in the world, changes in its economy will affect the global oil demand. But developing countries can have an even larger impact as their demand for oil rises.

News Events

Oil prices will usually rise if a major news event leads to disruptions in the supply and production chain. These could be related to political developments that affect producer countries – the beginning of Russia’s invasion of Ukraine sent oil prices soaring to $120 per barrel, for example.

On the other hand, news events that indicate increased supply or reduced demand mean a probable decrease in oil prices. Look out for news stories on major producers deciding to ramp up production or on large oil consumers divesting from fossil fuels.

Environmental Disasters

Some man-made or natural disasters can seriously impact oil prices, particularly if they threaten production facilities.

This was the case in 2005, when Hurricane Katrina struck the southeast USA, affecting about 25% of US crude oil production and wiping out up to 15% of refinery capacity immediately following the disaster. The hurricane caused the largest weekly hike in gasoline prices, which rose from $0.46 to $3.07.

The effect of oil spills tends to be somewhat less than you’d expect, probably because they tend to only affect a single rig at a time, and thus do not make a very large dent in overall production. They are likely, however, to cause a fall in the share price of the company responsible, which will need to pay for cleanup and compensation for the damage caused. This could in turn seriously impact the price of energy ETFs.

How To Trade Oil

Trading oil can be done through several vehicles, including:

• Futures: Futures contracts are an agreement to buy or sell an asset at a future date at a fixed price. They are traded on exchanges like the Intercontinental Exchange (ICE) and NYMEX/COMEX, using platforms such as TradingView to analyse the market and make informed decisions.
• ETFs: Exchange-traded funds are bought and sold like stocks and generally track the performance of a group of linked commodities or companies.
• Options: Options are contracts that are bought and sold giving the holder the right but no obligation to buy or sell a specific amount of oil at a fixed price at a future date.
• Spot trading: This is the buying and selling of the physical commodity, crude oil, at the current market price. Since spot trading involves buying and selling large quantities of oil, which will need to be transported and stored, it is not usually an option for retail traders.
• Other derivatives: Derivatives are financial contracts whose value is derived from the performance of an underlying asset such as crude oil. They can be used to speculate on future prices or hedge against price fluctuations. Examples include CFDs and spread betting.

CFDs & Spread Betting

CFDs (contracts for difference) and spread betting are popular ways for retail traders to speculate on oil prices as they are widely available from online brokers and do not involve owning the underlying asset.

Both of these derivative products are straightforward bets on the direction of the asset’s price movement. If the trader gets it right, they will earn the difference between the strike price, set when the contract begins, and the price when the contract finishes (minus any fees). If the prediction is wrong, they will need to pay the oil broker the difference.

Traders can adopt a long or short position on oil prices using CFDs and spread betting, and they can also open leveraged positions, increasing their trading power but also magnifying potential losses. An additional benefit of spread betting is that it is usually tax-exempt in the UK.

Comparing Oil Brokers

Given the popularity of oil trading, you will have a wide range of brokers to choose from. Here are some key factors to help you choose the right oil trading platform:

• Fees are part and parcel of online oil trading, but with a little effort traders can avoid overpaying. Look for oil brokers that offer tight spreads with no additional charges for withdrawals and other standard account functions.
• Security should be tight with most reputable UK brokers that offer oil trading but always check for FCA oversight or a license from another reputable regulator, such as the CySEC, ASIC, or CFTC.
• Range of assets is important for traders who want to branch out and deal in other commodities or a different asset class altogether.
• Customer support is not always high on traders’ lists of priorities – until they have an issue with their account. Live chat features or a responsive phone hotline can be a lifesaver, especially for beginners.
• Demo accounts are the best way to practice oil trading, test your strategy and get used to the broker’s trading platform without putting your own money at risk.
• Added features like copy trading are popular among investors who have limited time to research and read charts. Social trading tools can also be a good way to get tips from experienced investors.

Pros Of Trading Oil

• Access to a global market: The UK is a major player in the global oil market, which provides traders with access to a wide range of opportunities for buying and selling oil.
• Strong regulatory framework: The UK has a well-established regulatory framework that provides a level of protection for traders and investors who trade oil. These include the FCA, the OGA, and the DECC.
• Liquidity: The oil market in the UK is highly liquid, which means that traders can buy and sell assets quickly and easily. This helps traders to enter and exit positions at favourable prices.
• Diversification: Trading oil in the UK allows investors to diversify their portfolios, which can help to spread risk and potentially increase long-term returns.
• Volatility: The oil market has always been volatile due to the many unpredictable factors that influence oil prices. Skilful traders can capitalise on this volatility for profit.

Cons Of Trading Oil

• Volatility: The oil market is known for its volatility, which can make it risky for all traders. Prices can fluctuate rapidly, making it difficult to predict future movements and leaving traders exposed to significant losses.
• Margin requirements: Futures and options trading in oil typically require a significant amount of margin, which can be a barrier for traders with limited funds.
• Additional Costs: There are additional costs involved in spot trading. These are mainly made up of storage (in barrels) and transportation costs.

Strategies

Trend Following

Trend following involves identifying the overall direction of the oil market and buying or selling contracts in the same direction. Traders use technical analysis tools, such as moving averages and trend lines, to identify the direction of the trend and make oil trades accordingly.

Breakout Trading

Breakout trading revolves around identifying key levels of support and resistance and buying or selling oil assets when the price breaks through these levels. Indicators typically used for finding these levels include trend lines and pivot points.

Spread Trading

This strategy involves buying and selling two different futures contracts or options at the same time to profit from the difference between the two contracts.

For example, a trader can buy a WTI crude futures contract and sell a Brent crude futures contract. If the price of WTI crude rises relative to Brent crude, the trader will make a profit.

This oil trading strategy can be used to hedge against price fluctuations and potentially make a profit.

Oil Trading Hours

The trading hours for oil trading in the UK vary depending on the specific exchange. Some oil brokers also specify set times for online trading – IG’s oil trading hours are 7:30 am to 7:27 pm, for example. Assets that are tied to oil prices, such as shares in oil-producing companies or ETFs, will trade according to the market hours of their relevant exchanges.

• The Intercontinental Exchange (ICE): Trading hours for Brent crude oil futures on the ICE are from 8:00 am to 10:00 pm GMT, Monday to Friday.
• The New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX): Trading hours for crude oil futures on NYMEX/COMEX are from 8:00 am to 2:30 pm EST (1:00 pm to 7:30 pm GMT), Monday to Friday.
• London Stock Exchange (LSE): The trading hours for the London Stock Exchange (LSE) are from 8:00 am to 4:30 pm GMT, Monday to Friday.

Bottom Line On Trading Oil

Trading oil is an exciting form of online investing that suits more experienced traders with an appetite for risk due to the volatility present in the market. In the UK, this is a heavily regulated market so investors should be able to easily find a trusted broker to trade this commodity. Make sure you practice your trading and stay updated with relevant news and events to maximise your chances of profiting from this black gold.

To start trading, use our ranking of the best oil brokers.

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