December 12

Crude Oil Trading Strategies – What is it? (Crude Oil, Traders and Backtest)

Last Updated on 12 December, 2022 by Samuelsson

Many traders are interested in trading crude oil because of its unique position within the world’s economic and political systems. But what exactly does crude oil trading mean?

Crude oil trading is the buying and selling of crude oil with the aim of making a profit. This is done via futures, options, or CFD contracts, as traders try to profit from crude oil price fluctuations. Since crude oil is a limited resource, its price can fluctuate dramatically due to changes in supply and demand.

We find oil very difficult to trade because it’s heavily influenced by macro news. However, at the bottom of this article, we have provided a few examples of how you can go about making crude oil trading strategies.

In this post, we will cover the following:

  • What is crude oil?
  • What does crude oil trading mean?
  • How can you buy and trade crude oil?
  • History of crude oil trading

What is crude oil?

Crude oil is a naturally occurring fossil fuel that is refined into useable products such as gasoline, diesel, and other petrochemicals. It is a nonrenewable resource, which means it can’t be naturally replaced at the rate we use it. This also makes it a limited resource.

What does crude oil trading mean?

Crude oil trading is the buying and selling of crude oil with the aim of making a profit. Traders participate in the crude oil market via futures, options, or CFD contracts, as their interest is only to profit from crude oil price fluctuations. The price of crude oil can fluctuate dramatically due to changes in supply and demand, given that crude oil is a limited resource.

Due to its unique place in the world’s economic and political systems, crude oil is a highly liquid asset, which is why traders love to trade it.

How can you buy and trade crude oil?

The common ways to trade on the crude oil market include the following:

  • Crude oil futures: This is the most common way to trade crude oil, whether as a speculator or a stakeholder who wants physical delivery of the asset. Futures are standardized contracts and are traded on regulated exchanges.
  • Oil ETFs: A slightly different way to participate in the crude oil market, especially for a long-term player, is via oil ETFs. Crude oil ETFs are bought and sold the same way as many other shares in the stock market. When the price of oil fluctuates, this also influences the share prices of oil companies and, subsequently, the value of the ETF.
  • Crude oil spread betting: Spread betting is common among UK brokers. It offers leveraged trading in crude oil, which means that only a percentage of the total trade value is required to open a position. You will not own the underlying asset as a trader, but you will be able to speculate on price movements.
  • Crude oil CFDs: Contracts for difference (CFDs) are a type of financial derivative that, like spread betting, allow you to open a position on crude oil based on whether you believe the price will rise or fall. The main distinction between CFDs and spread betting is how they are taxed.

History of crude oil trading

The origin of the modern oil industry can be traced to Baku in 1837, where the first commercial oil refinery was established to distill oil into paraffin (used as lamp and heating oil). In terms of historical price action, crude oil hit its all-time high of $145.31 per barrel in July 2008. Its record low of $1.17 happened in February 1946.

Crude oil trading strategies and backtest (statistics)

Crude Oil Futures Strategy

 

 Its price affects the prices of many other commodities, such as gasoline and heating oil. Given the unique role of crude oil in the energy sector and the depth of the market, a crude oil futures strategy is necessary for portfolio diversification, hedging, and speculating on the future price of energies. What is a crude oil futures strategy?

A crude oil futures strategy refers to the methodologies and techniques you can use to profitably trade crude oil futures contracts.  A good crude oil futures strategy would include technical and fundamental analyses of the crude oil futures market, as well as risk management methods.

In this post, we answer some questions about the Crude Oil futures strategy.

 

What is a Crude Oil futures strategy?

A crude oil futures strategy refers to the methodologies and techniques you can use to profitably trade crude oil futures contracts. A good crude oil futures strategy would include technical and fundamental analyses of the crude oil futures market for market timing. In addition, your crude oil futures strategy must include techniques for position sizing, risk management, and so on.

To succeed in trading the crude oil futures market, you will need a robust trading strategy that offers precise entry and exit signals. Your strategy could be for speculation, hedging, or portfolio diversification.

Crude Oil futures Seasonality

 

Crude Oil futures Seasonality

Source: Equity Clock

What moves the Crude Oil market — What affects the Crude Oil market the most?

These are some of the factors that move crude oil prices:

  • Policies to combat climate change: Governments around the world are making policies to reduce the use of fossil fuels, which reduces the demand for crude oil.
  • Availability of renewable energy: Increased use of renewable and green energy sources would reduce the demand for crude oil.
  • Supply disruptions: Geopolitical crises, such as wars, terrorism, and international sanctions, in major oil-producing nations can affect crude oil prices. Also, oil supply disruptions can be caused by the Organization of Petroleum Exporting Countries (OPEC) if they intentionally decide to reduce output to push crude prices up.
  • Shale oil production in the US: The US shale oil production can cause an oversupply in the oil market. This was one of the main reasons for the 2015 severe decline in oil prices before OPEC decided to cut output to push crude oil prices above $50 per barrel.
  • Energy reports: Some energy reports, such as the U.S. Energy Information Administration (EIA) Weekly Energy Stocks report, which are released around 10:30 a.m. ET every Wednesday, does affect oil prices. Other keenly followed reports include the OPEC Monthly Oil Market Report, American Petroleum Institute (API) Inventory Report, Monthly Energy Review, and International Energy Agency (IEA) Oil Market Report.

 

What is the Crude Oil trading at? 

As of December 8, 2022, Brent crude oil futures (BRN) were trading at $77.17 per barrel on ICE Futures Europe. See the chart here on TradingView. On CME’s Globex platform, WTI crude oil futures (CL) were trading at $71.44 per barrel.

As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or from TradingView, click either of those links.

 

Where can I find trading charts?

You can find the chart on any trading platform that provides chart services. If your platform does provide charts, you can use TradingView, which provides free access to the charts of various instruments. However, to connect TradingView to your broker, you must subscribe to its Pro services. From the CME platform, you can also access the TradingView chart.

You can also use Yahoo Finance, which offers free chart services or subscribe to trading charts through a paid third-party platform like MultiCharts.

 

Why should you start trading Crude Oil futures?

You may want to trade crude oil futures for any of the following reasons:

  • To speculate on crude oil prices and profit from price fluctuations
  • To secure a stable supply of crude oil if run a refinery
  • To secure a good price for your product if you are a crude oil producing nation
  • To diversify your portfolio into the commodity market
  •  

What factors affect Crude Oil prices?

These are some of them:

  • Government policies to combat climate change
  • Availability of renewable energy
  • Supply disruptions due to geopolitical tension and sanctions
  • Shale oil production in the US
  • Energy reports, such as the U.S. Energy Information Administration (EIA) Weekly Energy Stocks report, OPEC Monthly Oil Market Report, American Petroleum Institute (API) Inventory Report, Monthly Energy Review, and International Energy Agency (IEA) Oil Market Report

What is the all-time high for Crude Oil futures?

According to the TradingView chart for crude oil futures (BRN), the all-time high for the contract is $147.50 per barrel, which was reached in July 2008.

What are the biggest risks in trading Crude Oil futures?

The biggest risk comes from adverse price movement. Given that futures contracts are leveraged, adverse price movements can lead to huge losses because the losses are calculated based on the total worth of the contract, not the margin deposited. For example, if you trade with a 20x leverage, a 5% adverse price move would lead to a 100% loss.

Which forex pair is the same as Crude Oil futures

Crude Oil CFD

What are some important dates for this market?

Some of the important dates include:

  • 1837: First commercial crude oil refinery in Baku
  • The 1970s: Iran revolution
  • 1983: WTI crude oil futures on NYMEX
  • July 2008: Current all-time high of $147.50

What is the highest Crude Oil has ever been — its all-time high?

According to the TradingView chart for crude oil futures (BRN), the highest level crude oil futures ever reached was $147.50 per barrel, which happened in July 2008.

What is the lowest Crude Oil has ever been — its all-time low?

According to the TradingView chart for crude oil futures (BRN), the lowest level crude oil futures ever reached was $9.55 per barrel, which happened in December 1998.

Conclusion

You can use a crude oil futures strategy to diversify your portfolio into the commodity market, hedge your exposure to the crude oil market if you are a stakeholder, or simply speculate on the market to profit from price fluctuations.

How can you trade and make money from crude oil futures?

1. Research: Research the crude oil futures markets and the different trading strategies you can use.

2. Choose a Broker: Choose a broker who can provide you with access to the crude oil futures markets.

3. Develop a Trading Strategy: Develop a trading strategy that works for your risk profile, goals, and market conditions.

4. Place Your Trade: Place your trade according to your trading strategy and manage your positions accordingly.

5. Monitor Your Positions: Monitor your positions and adjust your strategy as needed.

6. Close Out Your Positions: When you are ready, close out your positions and take your profits or losses.

Related reading:

Crude Oil Futures (CL) – Trading Strategies
Trading Strategy in Crude Oil!
Crude Oil Trading Strategies – What is it?


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