- By Mike Johnson
- 113 min
Oil is a raw material, a primary source of combustible energy. It consists mainly of carbon and hydrogen, in fact the compounds packaged by these two substances are called hydrocarbons. […]
Oil is a raw material, a primary source of combustible energy. It consists mainly of carbon and hydrogen, in fact the compounds packaged by these two substances are called hydrocarbons.
Nowadays it is possible to trade with oil, but before explaining how to do it, we will give you more information about this natural resource so important for man.
For extraction, drilling techniques are used through the use of oil wells, then there are refineries where huge amounts of crude oil are stored.
Here fuels such as diesel and gasoline or heating oil are manufactured.
In the refinery other substances are also extracted to produce plastics such as polystyrene, these represent 4% of the oil that is refined.
Polystyrene is also processed using naphtha, which is always derived from oil. As soon as it is manufactured it is in the form of pellets which are then processed and transformed into casings for the consumer market.
The steps for oil processing and packaging of the various products are as follows:
- Oil well;
- Naphtha processing;
- Plastic Creation;
- Polystyrene Creation;
- Manufacture of plastic objects.
The raw material of oil is used in trade through the use of various investment instruments, the most widespread of which is certainly that of oil futures.
Futures are a type of contract that obliges the two parties, on a given date, to exchange a certain amount of oil at a predetermined price, a price that nobody knows until the expiry of the contract.
The trades are made in dollars and the lot is 1,000 barrels, the various speculators make a prediction on the future price of the raw material in the coming months, if the investor assumes an increase in value then invests in futures.
We give you a practical example:
Today the trader enters into a contract and the price of oil is at $40, the same contract could reach $45 in six months (expiry date).
Most of the futures are quarterly expiring, most of the time only 3% of the transactions made turn into real purchase or sale of the raw material.
But why does this happen? Simply because you always avoid physically taking delivery of the raw material, this process is called “Roll Over”.
Investing In Oil Stocks
Investing in oil stocks could be a good choice if our aim is to diversify our online trading portfolio.
Many experienced traders are well aware that the oil market is a good choice to invest online.
The only difficulty is to be able to complete this type of diversification and this is because it is not always so easy to find alternative investments in this commodity.
Always remember to read carefully the opinions of the most experienced traders and all the best known analysts, investing in the oil market can be very interesting from the point of view of profits.
Analyze the various market trends and all the news related to this raw material, because any kind of news could influence its trend.
Many investors use the oil market for their operations after a fairly long period of crisis because it is precisely at these times that black gold offers its brightest performance.
Trading CFDs With Oil
Crude oil is one of the most important raw materials with a significant daily trading volume.
It is an unrefined fossil fuel from which other petrochemical products such as gasoline or diesel are distilled.
Most of the time traders do not physically purchase barrels of oil but opt to trade on its quotes.
CFDs or Contracts for Difference are used a lot to trade on oil because of the advantages that this instrument offers compared to all other financial instruments.
In fact, it is thanks to this derivative instrument that the small trader can try to make great gains with commodities.
Once upon a time, this type of market was only used by professional traders able to use a much larger portfolio.
How to Buy Oil ETCs
A few years ago ETCs (Exchange Traded Commodities) were launched on the market and this was due to the pressing demand from investors.
At first the request was only related to the entry into the commodities market because ETCs allowed to make any type of operation, to date the knowledge of the various traders has developed a lot.
ETCs offer traders the possibility to take long or short positions and choose which futures curve to obtain.
The moment an investor opens an ETC position on oil, regardless of the expiry date, he will receive different profits.
The reason for this is that normal events such as the closure of an oil refinery have a much lower impact on long-term ETCs.
On the other hand, one event that can have a major impact on oil prices in the long term is the rise in demand from all emerging economies.
Oil Trading Strategy
Oil and gold are the preferred commodities for investors around the world to trade online, both are very profitable trading opportunities.
For the trader it is of paramount importance to understand how to make capital investments in oil, most of the time it is the professional traders who use this market but even less experienced traders can do so.
This is one of the markets with the highest rate of liquidity and most traders use it to hedge the exposure of their portfolio from any fluctuations that the market may present.
There is a need for a very good strategy in order to be able to trade in it and achieve satisfactory earnings, a high level strategy that takes into account the different factors that influence the market such as demand or supply balances.
Another factor to be kept under control is seasonality, usually the price of crude oil tends to rise during the summer season and falls towards September/October.
Most of the time the inflation effect on oil is due to a cause/effect relationship.
Therefore, when the value of oil prices rise or fall, the related inflation also takes the same direction.
This is because of the enormous importance that this raw material has in the world economy, we all know that it is used as heating in homes or as fuel for cars.
If the cost of oil goes up, the cost of plastic will also go up, because it is a direct derivative, in this case the end consumer will assume part of the final cost.
This mechanism causes prices to rise and the related rate of inflation, in the 1970s this relationship was clearly direct, inflation and prices went hand in hand.
Or in 1973 when the oil crisis affected the cost of oil by about 35 dollars, however over time the correlation between inflation and oil price that occurred in the 1970s has gradually declined.