Trading Crude Oil: What You Need to Know

Crude oil has long been a popular investment commodity. When you look at everything that it has to offer, it isn't difficult to see why. Crude oil offers a rare combination of high liquidity and opportunities in just about all market conditions. These attributes owe much to crude oil's unique status as an integral component of current global political and economic systems.

Often, those who participate in the crude oil market fail to take advantage of the frequent fluctuations in price. This is either because they are yet to learn the unique intricacies of the marketplace, or because they are unaware that their current strategy might be costing them potential earnings.

In order to make the most of your investments in the crude oil market, there are certain things that you should keep in mind at all times.

Learn What Moves Crude Oil

Crude oil, like any other commodity, is affected by supply and demand. Where there is too much oil on the market - an oil oversupply - and a lack of corresponding demand, traders will be encouraged to sell crude oil. On the other hand, a rising level of demand coupled with declining or plateauing production will encourage traders to buy.

When there is a convergence between multiple positive market forces, the result is a powerful upswing in market value. Correspondingly, a perfect storm of negative forces can cause the price to crash through the floor.

Understand Your Competition

There are a lot of professional traders and hedgers operating in the energy futures markets. These players represent some of your most challenging opponents in the competition for profits. Many of the most deeply ingrained industry players will hold positions which offset their physical exposure to market forces. Others will speculate on short and long-term trends.

It is up to you to decide how you are going to play this game, but the more you can learn about the other players in the market, the better chance you will have of making it. There are a lot of shrewd and experienced entrepreneurs - such as Fahad Alrajaan - who operate in this market, which makes it very competitive.

Choose Between Brent and WTI

There are two main markets through which crude oil is traded. The first is the Western Intermediate (WTI), and the other is Brent. WTI crude oil, sometimes referred to as 'light sweet crude oil', originates in the US Permian Basin and other local sources. Brent, meanwhile, comes from one of more than a dozen of the North Atlantic oil fields.

The main differences between these two types of oil are their sulfur content and API gravity. Brent is generally considered to be a better indicator of the current market mood and price. However, WTI is more heavily traded on the futures markets.

The prices in both these markets remained more or less the same until 2010, at which point a significant divergence occurred.

Crude oil is a commodity worth investing in, but it is not a marketplace for the faint of heart. If you decide to try your hand at trading crude oil, make sure you know what you are letting yourself in for before you begin.