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Oil - Trading with commodities

  • Post category:Commodities
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Oil is one of the most traded commodities. Investors benefit from oil CFDs because they can speculate on both rising and falling prices. The biggest advantage of oil CFDs is the leverage effect, which allows investors to move large amounts on the financial markets with small capital investments. CFD trading in oil gives investors access to highly capitalized financial markets and investments that they would otherwise not be able to afford.

What are the uses for oil?

Petroleum is ubiquitous in our everyday lives, as it is in plastics as well as cosmetics. It makes our cars drive and industry run, because it produces electricity and is in numerous products such as plastics, electrical appliances and pharmaceutical products. Petroleum drives transportation, because in addition to cars, ships and airplanes also need petroleum. Brief examples: The production of a nylon tie uses 0.5 liters of petroleum, a television uses 2.4 liters of petroleum, and a shelf made of pressboard uses 7.5 liters.

How big are the deposits of oil and where are they located?

According to the German Federal Institute for Geosciences and Natural Resources (BGR), global petroleum reserves are around 244 billion tons. However, this figure is only an extrapolation, as the actual global oil reserves depend on the price of oil, technical progress and the development of new oil deposits. With 48 billion tons of crude oil, Venezuela has the largest oil reserves in the world.

Saudi Arabia (36.6 MT), Canada (27.6 MT), Iran (21.8 MT) and Iraq (20.6 MT) follow in 2nd to 5th place. Russia, Kuwait, and the United Arab Emirates follow in 6th through 8th place, each with more than 10 billion MT. The U.S. joins them with 5.8 billion MT. In Africa, the largest oil reserves are in Libya with 6.3 billion tons. The figures for Venezuela and Canada should be treated with caution, however, as Canada also includes its oil sand deposits and Venezuela its heavy oil deposits in the total. Both deposits are not pure recoverable crude oils.

What are the factors influencing the oil price?

Supply and demand influence the price of oil, because the higher the demand, the higher the price. As soon as the supply of crude oil increases while demand remains constant, the price falls. Global economic output is another factor determining the price of oil. The higher the economic output of a country, the greater the demand for oil. The countries with the highest economic output are China, the USA and Europe.

These three countries or continents consume up to 45 million barrels of crude oil per day. The financial crisis of 2008 and the Corona crisis of 2020/2021 curbed the industrial economic performance of countries worldwide. The result was declining demand and, consequently, falling oil prices. Currently, daily global crude oil consumption hovers around 98 billion barrels per day. Whether this consumption will still be as high in a few years depends on the development of renewable energies.

With the Bretton Woods Agreement in 1944, the U.S. dollar was pegged to the price of gold and all global currencies were pegged to the dollar. This became the reserve currency. Although the gold standard was abolished in 1971, oil continues to be traded in the U.S. currency. How well the U.S. dollar compares to other internationally important currencies such as the euro or the British pound therefore also has an impact on the price of oil. If the U.S. dollar falls in comparison with other important international currencies, the price of oil also falls. If the U.S. dollar rises in international comparison, the commodity also becomes more expensive.

Prices for crude oil are set on the futures markets. These are also known as the spot market or futures market. If a world market leader such as China were to decide to build more nuclear power plants, this development could have a sensitive impact on the price of oil, because the lack of demand from China would increase the global supply of oil and thus reduce the price. If, on the other hand, the fracking industry is expanded, the producing countries will increase the supply of oil.

This new situation would increase speculation on the oil market. The consequences could be both falling and rising prices. However, many countries, including Germany, France and Ireland, have banned the controversial method of fracking, so this type of oil extraction is not a real alternative to classic oil production.

OPEC is one of the most important international associations in the world. OPEC stands for the Organization of the Petroleum Producing Countries. This cartel consists of 14 oil producing countries to determine the global price of oil through supply control. If the price of oil develops adversely for these countries when the price on the international oil market falls, OPEC is entitled to artificially tighten supply in order to cause prices to rise again. The terms cartel and price fixing generally have a negative connotation. In this case, however, price fixing and supply regulation are deliberate in order to prevent competition among exporters for the lowest oil price. This negative development would have quickly depleted global oil reserves. By regulating oil production quotas, OPEC ensures that member countries receive a fair oil price. In 2018, OPEC members agreed on a daily production rate of 39 billion crude oil per day.

Although Russia is not a member of OPEC, it has declared its willingness to cooperate on a mutually agreeable basis. In the course of OPEC's artificial supply shortage, Russia has also agreed several times to reduce its own production volume. With an output of around 13 billion barrels of crude oil per day, the USA is the largest producer outside OPEC, followed by Canada and China. The countries grouped in the OECD (Organization for Economic Cooperation and Development) together produce about 24 billion barrels of crude oil per day. All non-OPEC countries produce about 53 billion barrels of crude oil per day.

Exogenous shocks such as wars, natural disasters and geopolitical instability are further factors in price inflation, as they cannot be explained or controlled economically. The news associated with these events should also not be underestimated. The more negative the situation is portrayed, the more people's fear of a supply shortage increases. The demand for crude oil increases, and so does the price.

Does seasonality have an impact on oil?

The international oil market and therefore prices are very volatile, i.e. they are always on the move, up or down. In this sense, there is no seasonality like the four seasons. The price of oil is not generally lower in summer than in winter. The price rises or falls for many reasons, and such developments are even possible from one day to the next.

The fact that there is not one, more favorable season is due to the fact that this valuable commodity is needed on a daily basis, both by the economy and by consumers. Artificial supply shortages, crises of all kinds, whether oil, economic or corona, as well as natural disasters and market speculation, can drive the price of oil up or down at any time of year. Seasonal patterns are particularly evident in heating oil, where the price is generally cheaper in summer when demand is lower than in winter when demand is higher.

Oil price forecast: How will the oil price develop until 2025?

Since no new oil deposits have been discovered to date, cheap sources of oil are gradually being depleted while demand remains constant. Demand for oil is largely determined by the global economy. If the economy were to cool down, this would mean a decline in demand for oil. Good global economic growth would increase demand for oil. However, OPEC has a major influence, which must always be kept in mind.


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Plus500 risk warning: 80% of CFD retail investor accounts lose money.

How to trade oil?

Through CFD trading, any investor can participate in trading oil. However, no one needs to put one or more barrels of oil in the basement to do so. The volatility of this commodity offers traders many opportunities to trade the fluctuating oil prices. The most traded oil types in CFD trading are Brent and WTI (West Texas Intermediate). There is also the OPEC basket price, which is made up of different types of oil from OPEC member countries. Through regulated CFD brokers, investors have the opportunity to invest in the commodity oil.

The abbreviation CFD stands for Contract for Difference. CFD trading offers the opportunity to invest in oil without buying it in physical form. Traders invest long and short, speculating on rising and falling prices. CFDs are derivatives, i.e. they are derived directly from the respective underlying asset, for example an index or a share.

Another way to indirectly participate in the oil price is to invest in oil stocks. For those who believe in rising oil prices in the long term, oil stocks can be interesting. If, on the other hand, you are only interested in short-term price fluctuations, CFDs are also the right choice.

What are the most exciting stocks in oil trading?

There are many oil stocks on the stock market. As an example, we have picked out two oil stocks that we think are interesting and described them briefly:

Royal Dutch Shell Shares

Royal Dutch Shell is one of the largest oil-producing companies in the world. The company is active in 140 countries and realizes more than $340 billion in sales annually. There are several billion oil shares of Royal Dutch Shell on the market, in which more than one million investors invest. Over the past 20 years, Shell shares have zigzagged, sometimes going up, sometimes down, due in part to a number of scandals.

Temporarily low prices on the oil market and the Corona crisis brought the oil company a record loss. In the meantime, the share price has risen slightly again, because oil is always needed and is an indispensable raw material worldwide. The market trend is positive, and analysts rate the share as undervalued.

In the event of company-specific problems, prices show only a slight downward trend. Those who buy Shell shares comparatively cheaply now can later profit from a positive market trend and sell expensively, i.e. profit from higher prices when they trade commodities.

Total shares

The French Total Group is one of the 20 most important oil producers in the world. Since the merger with its competitor Elf Aquitaine in 2000, Total has held a dominant market position. Although its production volume does not reach the huge corporations of the OPEC countries, the annual turnover of 200 billion euros per year and once again rising share prices after the Corona crisis make the Total share interesting for investors again.

Advantages of trading with oil CFDs

CFD trading is interesting for traders with an affinity for risk, as they speculate on underlying assets in which "normal" investors cannot invest.

One advantage of CFDs is the access to financial products with high capital stakes, which most investors could not afford in classic securities trading. Trading almost around the clock is also gladly seen, from which especially working traders benefit.

Plus500 risk warning: 80% of CFD retail investor accounts lose money.

Plus500 risk note: CFD are complex instruments and come with the high risk of losing money quickly because of the leverage effect. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFD work and whether you can afford to take the high risk of losing your money.