It’s clear that oil trading is one of the most popular methods of trading commodities, together with trading gold and other assets, but how difficult is it? To get started, traders typically focus on one of the two leading benchmarks, which are WTI and Brent crude oil.
We’ll be looking at the differences between them. This means covering the issues that affect their prices, the trading hours, and the most popular way for traders to access these markets and trade oil.
How to Trade Oil: Understanding WTI vs Brent Crude
When trading crude oil, traders must understand key differences between these benchmarks: West Texas Intermediate (WTI) and Brent Crude. We can see this by looking at the following factors.
Quality
Both WTI and Brent Crude are classed as light and sweet crude oil. This means that they both have a low sulphur content as well as low density. They are apt for an easy and relatively inexpensive refinery process into other products, such as gasoline. Brent is slightly heavier, while WHI is sweeter.
Production Regions
The regions where they’re extracted and the methods used have an impact on their price and supply chain. WTI is mainly extracted from onshore US sites and delivered through pipelines leading to inland storage hubs.
Brent is mostly extracted offshore, heading directly from the North Sea field to the global market through shipping routes.
Pricing Differences
The difference between the price of these types of oil is known as the Brent-WTI spread. This figure varies according to market forces. The WTI price is mainly driven by US domestic factors, while the Brent price is based on international supply and demand.
Why Brent Often Trades at a Premium to WTI
Why does WTI trade at a discount to Brent? The Brent price has traded at a premium to WTI in recent years for several reasons, including lower transportation costs and more accessibility to international markets.
In addition, the Brent price often increases more during periods of international tension, while the WTI price isn’t as affected due to its domestic focus. Like all types of commodity trading, traders need to keep an eye on international news and events to see what price swings might be on the horizon.
Oil Trading Platforms and Ways to Access the Market
An entry into the WTI and Brent oil trading markets can be carried out in a variety of ways. The following are some of the most popular methods to consider.
CFDs
With a contract for difference (CFD), traders aim to speculate on WTI and Brent crude oil price movements. They don’t own the underlying commodity, as this method is about using long and short positions to benefit from rising or falling prices.
CFDs are highly flexible, since they can be used with leverage. However, this means that a high level of risk control is needed. When trading oil CFDs, it’s important to use a platform with fast execution speed, since this ensures that orders are filled swiftly even in highly volatile conditions.
Futures
These contracts are set up with an agreement in place to buy or sell at a set price on a predetermined date in the future. In terms of oil commodity trading, futures are widely used by institutional investors to hedge price risks and to speculate on future price movements.
The process of trading futures ensures highly transparent prices. However, they perhaps aren’t as suitable for newcomers as some of the other instruments, since they require traders to understand contract terms and rollovers.
ETFs
Exchange-traded funds (ETFs) provide a simple option for WTI and Brent oil trading. It involves buying shares in a fund that is traded on the market. Some oil trading ETFs directly track the latest prices, while others invest in oil company stocks as a way of investing in the industry.
This is arguably one of the lowest-risk ways to trade oil. Rather than speculating on the direction of the price, this is simply a long position where you hope to see the price of oil rise over time, with no leverage used. However, you should be clear on the amount of management fees involved in the ETFs.
Commodity-Focused Platforms
Using a crude oil trading platform like ActivTrader gives traders access to the latest prices and products in a specialised environment. This can also mean using the likes of MetaTrader4 or 5 to access real-time data with charts and tools that allow technical and fundamental analysis to be carried out.
If you’re looking to find out which approach suits you best, you might like to find out more about using trading demo accounts to simulate your trades and see how you get on using practice mode.
What Moves Oil Prices in WTI and Brent Trading?
Oil price movements are driven by various elements. Before you try any crude oil trading strategies, you should be aware of these important factors.
Supply and Demand
The most important aspect of this industry is the balance of supply and demand. When the need for energy is greater than the production levels, we expect to see prices rise.
On the other hand, when there is a larger supply level than the current demand requires, this tends to push the price down.
OPEC Decisions
When the Organisation of the Petroleum Exporting Countries (OPEC) makes a decision, it usually affects the price of this commodity. They announce changes such as adjustments to their production quotas, which are often done to support prices or to increase them.
Geopolitical Tensions
The fact that a large percentage of the world’s total oil supply is produced in regions that are often subject to political tensions adds to the volatility. Major geopolitical events can cause disruption to supply routes and cause price spikes in the market.
Inventories
Inventory details, such as the US crude oil stockpile updates, are other important factors in the market. When inventory levels are high, this means that the price may fall because it suggests that there’s a surplus.
Economic growth
The demand for oil and other types of energy is closely linked to the global economic growth rate. When economies start to grow, oil demand increases, which typically pushes up the price. If economies stagnate, this is more likely to lead to reduced demand and falling prices.
Inflation
The link with inflation isn’t as clear as some of the other areas we’ve looked at here. However, some people view it as one of the possible ways to hedge against inflation, using their oil position as a store of value. We also need to bear in mind that oil prices can increase inflation when they rise.
The US Dollar
The fact that oil is priced in US dollars around the world means that there is a clear link between these assets. Oil becomes cheaper or more expensive for other nations depending on the dollar’s price movements, adding an extra layer of volatility.
When trading oil, you should be aware that major global events frequently add to the volatility of this market. Supply and demand are often affected, with disruption to production centres or supply routes causing price swings.
WTI and Brent Trading Hours and Market Timing
The trading hours for Brent crude oil and WTI are close to 24 hours during the five-day trading week. Knowing the timing of market sessions is crucial for understanding market movements and managing the risk involved in your trades.
- WTI crude oil trading hours are Sunday through to Friday, mainly at the New York Mercantile Exchange.
- Brent crude oil trading hours run from Sunday until the final session closes on Friday night.
The most intense trading period tends to be when the New York and London sessions overlap, which is when we often see the highest volume spikes and the Brent-WTI spread is closely monitored by institutional traders.
Oil Trading FAQs for Beginners
Is Oil Trading Suitable for Beginners?
This commodity offers a way to diversify your portfolio and potentially benefit from market volatility. However, you need to be aware that it’s a highly volatile market that requires a disciplined approach.
What’s the Easiest Way to Trade Brent Oil and WTI Oil?
Some beginners prefer CFDs, since there is no need to own the underlying asset. Others prefer the simplicity of ETFs, which are easy to set up and don’t involve any leverage. Take some time to understand which approach suits your needs and risk profile.
What Are the Biggest Risks with Crude Oil Trading?
Extreme price volatility is a risk with this commodity, whose price can be severely affected by various situations. Good risk control processes need to be put in place to ensure that any big price swings are dealt with sensibly.
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