Oil and Gas Trading
Discover how to trade oil with our step-by-step guide – including what spot prices and oil futures are, what moves the price of oil and the ways you can trade with us.
Oil trading is the buying and selling of different types of oil and oil-linked assets with the aim of making a profit. As oil is a finite resource, its price can see massive fluctuations due to supply and demand changes. This volatility makes it extremely popular among traders.
You can use CFDs to trade on oil’s spot price, or the prices of oil futures or options contracts, without having to own any actual oil.
As of January 2015, the average net profit margin for the oil and gas drilling industry is 6.1%. The industry takes into account the profit margins of a number of companies, including Diamond Offshore Drilling, Inc (NYSE: DO) with a net profit margin of 7.23, Helmerich & Payne, Inc (NYSE: HP) with a net profit margin of 17.12 and PostRock Energy Corporation (NASDAQ: PSTR) with a net profit margin of 28.16. The net profit margin of a company is one of the most closely tracked metrics in profit analysis and investors utilize this information to determine whether an investment is suitable.
Oil spot prices represent the cost of buying or selling oil immediately, or ‘on the spot’ – instead of at a set date in the future. While futures prices reflect how much the markets believe oil will be worth when the future expires, spot prices show how much it is worth right now.
Oil futures are contracts in which you agree to exchange an amount of oil at a set price on a set date. They’re traded on exchanges and reflect the demand for different types of oil. Oil futures are a common method of buying and selling oil, and they enable you to trade rising and falling prices.
Futures are used by companies to lock in an advantageous price for oil and hedge against adverse price movements. However, they’re popular among speculative traders too as there is no need to take delivery of barrels of oil – although you have to fulfil the contract, this can be via a cash settlement.
Oil options
An oil option is similar to a futures contract but there’s no obligation to trade if you don’t want to. They give you the right to buy or sell an amount of oil at a set price on a set expiry date, but you wouldn’t be obliged to exercise your option.
There are two types of options: calls and puts. If you thought the market price of oil was going to rise, you might buy a call option. If you thought it was going to fall, you’d buy a put. You can also sell call and put options, if you wanted to take the opposing positions. Selling options can generate income in quiet markets, as you receive their value at the outside of your trade. But be careful – this is your maximum profit, and you could lose far more if the market goes against you.
What moves the price of oil
The price of oil is primarily moved by the relationship between supply and demand. When there is a demand for oil that outstrips its supply, the price of oil will rise. But if demand falls and supply floods the market, the price of oil will fall.
There are a huge number of factors that can impact oil supply and demand, we’ve taken a look at four of the most common below.
Factors affecting oil supply and demand
The influence of OPEC
Countries within the Organisation of Petroleum Exporting Countries (OPEC) produce a large share of worldwide oil supply. The group sets production levels to meet global demand, and can influence the price of oil by increasing and decreasing output.
During the 2020 Covid-19 pandemic, OPEC and its allies agreed to cut production rates to stabilise prices. But a disagreement with Russia – a non-OPEC country but large exporter – caused a sheer drop in the price of oil.
Global economic performance
In periods of economic growth, the demand for oil increases to meet the needs of industries such as energy, transport, manufacturing and pharmaceuticals. If demand outweighs supply, then the price of oil will be driven up.
However, if the economy is in a period of recession, demand for oil will fall and lead to lower oil prices if production continues.
Oil traders often use economic data releases to understand the health of an economy – such as GDP and employment figures.
Oil storage
When the demand for oil fails but production continues, there will be a surplus of oil, which is diverted into storage facilities. But, there are limits on the amount of oil that can be stored. As these tanks fill up, concerns about surplus oil will impact market prices.
For example, in April 2020, traders’ worries over tightening oil-storage capacity amid the coronavirus caused crude oil futures to fall dramatically. At one point, the price of oil became negative for the first time.
CHARACTERISTICS
- Expert analysis - Get technical and fundamental analysis straight from our in-house team
- Trading alerts - Keep your finger on the pulse with unique price and economic data alerts
- Trading signals - Get actionable ‘buy’ and ‘sell’ suggestions based on analysis
- Technical indicators - Discover price trends using popular indicators such as MACD and Bollinger bands
Ways to Trade
- Our oil spot prices are based on the two nearest futures on the market in question. This means you’ll benefit from continuous pricing – enabling you to see charts across the market’s entire history, rather than just the duration of a single future – and no fixed expiries.
- Our undated contracts are useful for taking shorter-term positions and performing technical analysis over a longer timeframe.
- Once you’ve created your account and logged in, you can trade oil spot prices by:
- Searching for the oil market you’d like to trade
- Selecting ‘spot’ with us
- Choosing your trade size and opening your first position