How To Make a Profit From Crude Oil Trading

By  //  September 8, 2019

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Understand what moves crude oil prices

Crude oil is ranked among the most volatile energy product in the world, making it one of the most profitable markets for traders.

Crude oil is ranked among the most volatile energy product in the world, making it one of the most profitable markets for traders.

Crude oil offers a variety of exceptional investment opportunities due to its unique ratings in the world’s economic and political systems. Many traders often do not take full advantage of crude oil price fluctuations.

Either because they don’t understand the characteristics of these markets or because they are not aware of the hidden risks involved. Below are the five steps that you can follow to make a consistent profit while trading in crude oil.

  1. Understand what moves crude oil prices

Supply and demand are the two significant factors that determine the price of crude oil worldwide. Oversupply and low demand make traders sell crude oil at a lower rate. While high demand and low supply encourage traders to trade crude oil at higher rates.

An excellent example of how demand and supply works is in April 2008, where the crude oil prices rose to a staggering $145.81 per barrel due to low supply and very high demand. Things took a different turn in August 2015 as the prices dropped to $37.75 per barrel due to low demand and oversupply of crude oil. Prices tend to stabilize when both the demand and supply factors are similar.

  1. Know the personalities involved in the trade

Energy markets are mostly dominated by hedgers and professional trader, who trade in both short and long-term market directions. It is also important to also note that retail traders can also influence the crude oil market.

When crude oil market starts to trends, it attracts capital from retail traders who are drawn to the market by the front-page headlines. This wave of both greed and fear by small/retail investors can impact your profits either positive or negative, depending on how the market is at that time.

Over the years, the volatility in the energy sector has risen rapidly, ensuring predictable patterns that give both short-term and long-term traders stable returns while trading in trade commodities.

  1. Understand the market

When trading in the crude oil market, you will quickly discover that there are two primary markets to pick from. They Include the Brent crude market and West Texas Intermediate Crude Market. WTI gets its oil from US Permian Basin fields and other local sources, while Brent Market oil comes from many oil fields located in the North Atlantic. Both these markets offer different products, and choosing the right product will come down to doing the proper research.

  1. Examine the long-term trends

When trading in crude oil, it’s essential to fully understand that there are no guarantees that you will make a profit. After World War ll, WTI crude oil rose to its peak. A few years later it began to drop significantly until 1999 where it started rising again, reaching an all-time high of $157 in June 2008. Then it started dropping, settling at around $55 in 2017.

  1. Choose your investment venue

There are a few venues available that one can pick from when it comes to investing in crude oil. 

a)   The NYMEX WTI Light Sweet Crude Oil Contract: This contract offers trade contracts above 10 million contracts per month. However, this trading venue is extremely risky. This venue mostly attracts professionals and a few private investors or traders.

 b)  The U.S. OIL Fund: It is probably the safest and popular way to invest as they play crude oil through equities, it boosts of posting an average daily volume above 20-million shares. This venue also tracks WTI futures but is vulnerable to contango.

 c)   The iPath S&P Goldman Sachs Crude Oil Trust ETN: It is also an alternative avenue, which has an average daily volume of about three million shares.

d)  Other Oil Companies and Sector Funds: Majority of these companies follow the crude oil trends and can diverge for long periods. 

Conclusion

To be able to make a profit in crude oil and energy markets, one requires top-notch skills to build consistent profits. Traders need to learn what moves the commodity, the nature of the crowd, know how to read the history of a commodity and the physical variations between different grades.

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