Should You Trade Oil with CFDs?

Oil prices have been volatile over the last year or so due to the coronavirus pandemic and with the price back at 2018 highs, there are fears over a resurgence in the winter.

The initial stages of the pandemic saw oil actually crash to negative prices due to supply problems in the futures delivery market. Since then, the price of crude oil has ridden a wave of economic rebounds and vaccine rollouts to punch to continued highs.

As we enter the second half of 2021, virus variant fears are rising, while there has also been a new wave of violence in Afghanistan, sparking new fears over the Middle East trouble spot. This article explains how you can take advantage of oil’s volatility with CFD trading.

Why CFD Trading?

Buying physical oil is obviously not feasible for the private trader as it is dominated by large trading houses and requires delivery and storage costs. The other option is to trade oil through ETF-style investments or futures, but both can require large liquidity requirements and margin. Trading oil through CFDs will allow investors to participate in the price swings of oil with a contract that tracks the underlying asset, which in this case is oil. Investors can trade in West Texas US crude oil or Brent UK crude, but an account will also give investors access to other commodities such as natural gas or copper and this is why CFD trading is a popular means of trading oil.

Oil Prices in the Pandemic

Oil prices had been strong going into the coronavirus pandemic after a recovery from the 2016 price slump. That had been driven by a surge in production from the shale oil patch in the US.

After decades of slowing production, new technology opened up the shale oil patches of land in the US and saw a boom in investment and activity which put paid to the peak oil talk. The USA moved from being an oil importer to an exporter and a supply glut soon occurred until the 2016 lows had wiped out some of the weaker producers.

Oil prices saw a high in 2018 around the $76 per barrel price before pulling back. The price was trying to head back there and saw a peak of $66 in January 2020. March and April 2020 saw the price crash to extremely low prices with tankers stranded off the US coast and traders trapped with deliveries that couldn’t come ashore.

A strong surge in May to $34 was the foundation for the next move higher and it was the emergence of the virus vaccine in November which propelled prices towards the $50 level. Prices have since continued higher to those 2018 highs at $76 but in August, traders are worried that the virus variant will derail the economic rebound, while new problems in Afghanistan have emerged.

The Impact of OPEC+

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental group of 13 countries. The unofficial leader of that group is Saudi Arabia due to the size of its reserves and production. The group was expanded in 2016 to include Russia.

OPEC production levels have always been important, but the group was thrust further into the spotlight in 2014-16 to combat the oil price crash. Countries had to balance oversupply in the market at a time when lower prices were hitting their government budgets.

This has continued into 2021, first with the supply glut from shale oil, and secondly from the after-effects of the pandemic and the havoc that has occurred in the oil market. In mid-2021 the US has been pressuring OPEC+ to take action again as higher oil prices have driven inflation in the largest global economies.

Price Events to Look Out For

The key to trading oil is the supply and demand issue but this has an impact on prices at a higher level as the data will change on a monthly or quarterly basis. Watching country data and the weekly releases from the US Energy Information Administration (EIA) are important here.

Energy imports are the other important part of the supply and demand picture, and oil prices follow the economic data to track how economic performance in the oil importing nations will be. Europe and China are big importers and are key, while the US also consumes a lot of oil and traders will follow the country’s GDP and other indicators such as jobs data. With oil priced in US dollars, the greenback also has a big part to play and dollar rallies can hit oil prices.

The EIA also publishes a weekly US inventory data report which tracks the storage levels at the Cushing, Oklahoma storage facility which is one of the most important oil hubs in the world.

The weekly Rig Counts data is produced by energy company Baker Hughes and tracks onshore and offshore drilling rigs in operation in North America. The trends in that data will give an idea of changes to supply and demand in the US.

Geopolitics and Oil Trading

The final piece of the puzzle if you are looking to trade CFD oil contracts is geopolitics. The US-China trade war which started in 2017 was a headwind for the oil market as traders feared that tariffs would affect the shipping market. China is also vital to world trade and a slowdown, or souring in relations between the two countries, is not ideal. The Middle East has always been a problem point for oil prices due to the region being a vital trading hub for the delivery of oil to Asia. The Strait of Hormuz near Iran is a narrow, but vital waterway which sees a large portion of global oil supplies running through the region. The region has also been a point of concern as violence or regime change can affect some of the OPEC producer countries and could drive up prices.

How to trade Oil with CFDs

Are you wondering how to trade oil with CFDs? A CFD is a type of contract, typically between a broker and an investor, in which one party agrees to pay the other the difference in the value of an asset between the opening and closing of the trade. CFDs are typically held within shorter timeframes, rather than as long-term investments.

The advantage of CFD trading is that you can profit from your position whether the price of the asset rises or falls. How? You can take a long position if you expect the price to rise, or you can open a short position if you expect the price to fall.

With the same account, CFDs also allow you to speculate on other financial markets, including stocks, indices, and forex. You never buy the assets, but trade on the rise or fall in their price, usually over a short period of time. The “Contract” allows you to capture the “difference” in price over a certain time period.

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