General presentation of oil:
Oil on the stock markets, on which it is possible to speculate online, is negotiated in the form of barrels of crude oil. Here we do not include refined products, or petroleum companies.
It is traded every day on the Spot market or in cash in the form of futures contracts. These contracts are basically promises to buy or sell a fixed number of barrels at a given date, generally between 3 to 6 months. The price of this sale or purchase is obviously known in advance. These contracts are generally called ‘paper barrels’. These contracts enable the operators to cover themselves against the risks of major variations in the prices.
Although oil is highly interesting for individual investors this is mainly because of its high volatility and therefore the possibility of experiencing major variations in its price over a very short time period which thereby offers the opportunity of making significant profits over the short term.
Why invest in the oil market?
Let us first look at the advantages of the crude oil market in terms of investment.
Firstly, for long term placements, oil is a choice asset. Recently this fuel commodity has experienced a significant drop due an excess in production by the OPEC countries. However this situation will not continue indefinitely and specialist analysts in this market predict a strong return to higher prices in the near future. It is therefore judicious to take position now on oil in order to benefit from the low prices and keep a long position until a significant increase occurs.
However, investing in the oil market can also be beneficial over the short term. In fact, this asset is one of the most volatile which means that differences in the recorded price can often be quite large over short periods and the trends observed are quite significant.
Why is oil attractive over the long term?
Oil has long been a recognised long term investment according to finance professionals as it is a type of safe asset that is, in a way, protected by the strength of the demand. But for a few months now the price of oil has taken a big drop due to an over production from certain oil producing countries and a refusal of OPEC to lower their quotas. Demand is therefore not moving normally, the price per barrel has also been subject to the speculative consequences of this phenomenon, traders are selling their positions in droves.
But nowadays, and with the price of oil attaining a historical low point, the long term perspectives seem to be quite attractive. It is in fact judicious to take position now and buy oil while benefiting from its low price as specialist market economists agree that a new rising trend is foreseeable in the months or the years ahead. Oil therefore currently represents an ideal placement for individual investors.
Invest effectively over the long term in oil:
To implement a successful trading strategy over the long term with oil, you should pay attention to certain points.
- Also, remember to place stop orders at the right place, that is to say not too close to the starting price as the definitive rise of the oil price could experience temporary dips on its way up.
- Don’t hesitate to cover your long positions with shorter opposite positions using a high leverage effect this time, to limit your losses and increase your profits.
How to invest in the oil sector?
As stated above, there are different ways of investing in the oil sector. The first method, which is the most profitable by far, is speculating directly in the price per barrel of WTI or Brent oil, directly on the markets.
This method is accessible to all following a simple registration with an online trading platform. The two major tools enabling speculation on the oil price are the CFDs, or Contracts for Difference.
You may however decide to invest in petroleum company shares, again through trading online and with the same tools, or by purchasing these shares and adding them to your stock market portfolio in a bank product placement, which however generally offers lower profits and takes longer to achieve.
Trading in oil online and how it works:
As you undoubtedly know, the price of oil varies according to supply and demand on the international level, and its movements. This is because these variations in supply and demand are directly linked to the global economic health. Therefore in a period of growth, the forecasts for the oil demand increase, which tends to cause an increase in the price per barrel of oil, and the contrary in a time of recession.
Buying or selling oil online basically means anticipating its movements and predicting the rise or fall in the price per barrel in advance.
Buying and trading oil online using CFDs:
The best adapted trading instrument for speculating in oil is undoubtedly the CFD. These ‘Contracts on the Difference’ actually enable you to take position on the purchase or sale of the price per barrel of oil.
Using CFDs could not be easier and this is undertaken on a trading platform. You simply need to speculate an amount on a Buy position on the barrel price if you predict that the price will rise, or on a Sell position if you predict a fall. When you close your position, if the trend has moved in the direction you predicted, then you will profit from the difference between the purchase price and the sale price. The leverage effect accessible on the Forex trading platforms will enable you to benefit from all the price variations, even the weakest movements.
This leverage effect in fact multiplies your investment by 100, 200, even 400, which therefore multiplies your profits accordingly.
There exist of course numerous functions that enable you to manage the risk level of your positions or schedule an automatic closure of these if a given threshold is attained.
Example of trading in oil using a CFD:
To better understand how CFDs function with oil, let us imagine that we predict a rise in the price per barrel of Brent oil. You may therefore take a position at €100 on a CFD with a rate of $50.00 and a leverage effect of 1:100. This means taking a position at €1,000.
The price of oil passes from $50.00 to $55.00 and you decide to close your position. In this case, your profit will be equivalent to 10% of your investment with the leverage effect, that is €100 as you resell your position at €1,100.
Imagine now that, contrary to your forecasts, the price of oil fell to $45.00 and you decide to limit your loss by closing your position. In this case, you will resell your position at €900.00 and will incur a loss of €100.
The CFD platforms for trading in oil:
The trading platforms of the CFD brokers are not uniquely dedicated to trading in currencies, they also offer CFDs, or ‘Contracts for the Difference’, that enable speculation on numerous other assets such as commodities and therefore oil. This is why you can speculate on the rise or fall in the price of barrels of crude WTI oil or Brent oil through the intermediary of these platforms.
The advantages of these trading platforms and CFDs for oil are numerous. Among the latter we particularly note:
- A simplification of use that ensures its availability to one and all.
- A leverage effect that enables significant profits but losses as well
- Innovative and high performance trading assistance tools
- Free demonstration accounts.
The CFDs on oil offer you great freedom by enabling you notably whatever the state of the market as you can speculate on the rise or on the fall in the prices.
The sale of crude oil online using CFDs:
The trading instrument that is undoubtedly the best adapted for the sale of crude oil online is that available through CFD brokers, the CFDs or ‘Contracts for Difference’. These contracts actually enable you to buy and sell barrels of crude oil so you can make profits (but losses as well) from the price movements, without the constraints of actually having to buy physical crude oil, notably those relating to transport and storage which is highly regulated for this commodity.
CFDs in fact offer you the opportunity to take a virtual position on buying or selling crude oil. The two types of crude oil from the stock markets that you can trade online are the American WTI and the European Brent.
Quotation and history of the oil price:
Depending on the trading platform that you intend to use or the placement products available through your bank, you may encounter two different types of crude oil. These represent the major types of different crude oil available on the commodities market. WTI (West Texas Intermediate) which is produced and stored in the United States and Brent which is the crude North Sea oil. Apart from those there are other lesser known types such as Dubai Light and Arabian Light.
These different oil quotes are classified according to their quality and therefore the ease of extracting refined products from them such as petrol.
Oil is quoted on two major spot and fixed term markets, the NYMEX (New York Mercantile Exchange) and the IPE (International Petroleum Exchange) which is based in London. In this article we are not examining the spot markets that deal in refined or finished products; these are quite numerous and tend to be close to the refinery zones. In Europe one of the better known of these markets is the ARA (Amsterdam, Rotterdam Anvers).
The historical rates of oil show a relative rise in the price since 2002 due to the high demand from emerging Asian countries such as China. The record price for WTI is $150 per barrel which occurred in 2008.
How exactly is oil sold online?
To use the CFDs and start selling or buying crude oil online, you must first start by opening a trading account with a professional Forex broker. At the end of this article you will find the name of a highly reputable broker we recommend for their services, who is also approved by the financial authorities.
Once you have created your account, you simply need to take position on either buying or selling crude oil and speculate the amount you wish. If you wish to buy, then you basically need to sell your oil at the moment the price has achieved the level needed to make a profit (but losses as well). If you have taken a selling position then you should wait for a drop in the price to close your position and thereby profit from the difference.
The advantage of selling crude oil using CFDs is that you can benefit from a leverage effect which offers you substantial profits even with a small investment or with only a small difference in price between the opening and the closing of your position.
Of course, other tools are placed at your disposal on the online trading platforms to enable you to sell your crude oil effectively and make the maximum profits (but losses as well). These include orders such as ‘Stop Loss’ and ‘Take Profit’.
Investing in oil company shares
Although it is possible for you to speculate directly on the price per barrel of oil as a commodity, you should know that there is another way to benefit from the fluctuations of this energy sector; investing in the shares of petroleum companies.
But what are the investment opportunities related to these shares and how can you achieve maximum profits by anticipating the movements of the prices in an optimal way? This is what we shall look closely at here with some detailed explanations.
The petroleum businesses quoted on the stock markets:
The petroleum businesses quoted on the stock markets are of course numerous as this sector of activity is one of the most profitable despite the economic crisis of the last few years. It is therefore easy to find, among the large European and international stock market indices, production or distribution companies that are related to the petroleum sector.
You will thereby be able to access these companies’ shares fairly easily, as well as other types of shares on the stock markets. We can differentiate between the different types of businesses related to the petroleum sector.
- The companies that produce and distribute crude oil.
- The companies that refine crude oil and commercialise derivative products such as petrol, diesel or heating oil.
Depending on the type of business, the price of crude oil has a variable impact depending on its relativity.
The solutions for investing in petroleum company shares:
There are two major possibilities for investing in petroleum company shares. The first is creating a stock market portfolio through bank placement products, and the other is speculating on these shares directly online.
- Buying petroleum company shares: The majority of banks offer their clients the possibility of investing in the oil sector through the purchase of petroleum company shares. But although this type of investment offers certain advantages there are also some major drawbacks. By purchasing these shares you can only speculate on a rise in price but the petroleum market fluctuates a great deal and prices both rise and fall. Also, you need to be very patient or have major investment capital to enjoy substantial profits with these shares. The placement solution is therefore not the simplest or the most profitable solution.
- Speculate on the share prices online: Luckily for you, and only since fairly recently, the stock markets have become accessible to all individuals through online trading platforms operated by CFD brokers. The latter offer the opportunity to speculate on the rise and fall of the large petroleum company share prices using specific contracts called CFDs.
Technical analysis on the oil market
To trade on the price of a barrel of oil and have the possibility of making substantial profits, it is essential to know how to complete a complete technical analysis of this market in order to best anticipate the future movements of the price of black gold and take profitable positions.
To assist you, we have decided to dedicate this article to technical analysis on the oil market by explaining why this analysis is important and which indicators to favour.
Why use technical analysis with the oil market?
The oil market has long interested professional and individual investors around the world. In fact, like the majority of the other commodities, crude oil is considered as a speculative asset that is particularly interesting due to its strong volatility that offers the possibility of substantial profits but losses as well.
It is by analysing the market reactions from the charts that you will more likely understand the dynamics that create rising or falling trends on this asset.
The technical analysis is equally interesting if you trade using tools from the online trading platforms such as CFDs as they will allow you to detect short term trends and real daily opportunities.
How to complete a pertinent technical analysis for the oil market:
Let us now look at how it is possible to complete a technical analysis that is pertinent to the oil market. Above all, you should ensure you have a complete chart that can be modified to show the periods you choose and the indicators you wish displayed. The display of default technical indicators on your chart is a real advantage as in that case you will not have to make complex calculations yourself.
The technical indicators to favour for a market analysis of oil are as follows:
Do not forget the fundamental analysis:
Although the technical analysis alone can enable you to achieve reasonable profits on the oil market, it is judicious to keep an eye on the fundamental analysis: This means the economic events that may influence the oil market.
Here we will particularly monitor the value of the American Dollar, as well as the production of the OPEC countries and the state of the American oil stocks.
The indicators to follow for trading in oil:
Several factors influence movements of the oil price. To assist you in finding your way, here are the elements that you need to follow:
- The natural factors: The statistics concerning the oil fields and their long term exhaustion should be taken into account for your long term positions on oil. In parallel, global warming should lead to a drop in consumption.
- The geopolitical factors: The different conflicts and agreements between the consumer and producing countries strongly influence the prices over the short term.
- The level of stocks, notably published by the United States, also has a strong impact on the price of oil.