Oil prices can vary depending on changes in supply and demand. The two most traded benchmarks of crude oil are Brent Crude and West Texas Intermediate (WTI). Other ways of gaining exposure in the oil market include cash or future contracts, oil-related stocks, and ETFs.
*Trading in financial markets carries a significant risk of capital loss
Oil is one of the most actively traded commodities across the world. It is a fundamental force driving the global economy.
Oil prices have historically been prone to dramatic rapid ups and downswings. The political crisis, weather, and economic conditions alter oil supply and demand. This results in volatility in oil prices which offers trading opportunities.
There are various ways of trading oil. They include oil futures contracts, cash contracts, oil-related stocks, or ETFs.
The ongoing Russia-Ukraine war has triggered massive volatility in oil prices on supply concerns. Meanwhile, oil demand has soared in the wake of easing travel restrictions.
Futures: Oil futures are an agreement to buy or sell an exact amount of oil for a set price at a set date in the future. This is the most popular method of trading oil. However, trading on oil futures can be a risky process as futures prices will also fluctuate depending on the price of oil, which is impacted by many external factors.
Stocks: Trading stocks of oil-related companies, for example, Exxon Mobil, ConocoPhillips, among others, is another way to gain exposure to oil markets.
ETFs: Oil exchange-traded funds (ETFs) track the price of oil as a commodity, providing traders with direct access to the oil market.
Changes in supply and demand highly influence the price of oil. If oil supply is constricted, and the global economy is booming, demand rises, consequently pushing oil prices up. Inversely, if global economic growth slows, demand falls, likely inducing a drop in prices.
Diversify your traditional equities’ portfolio with oil benchmarks both in the spot and futures market, and oil-related stocks and ETFs.
Oil has historically gained more than other comparable asset classes in times of inflation and is thereby considered to be a hedge against inflation.
Oil futures are one of the most liquid investments because of the high volume that is traded every day.
Oil is an irreplaceable scarce resource and has inevitable demand. However, most of the crude oil reserves in the world are in regions that have been prone to economic and political upheavals. Weather also plays a significant role in the supply of crude oil, leading to price fluctuations.
Apart from crude oil trading another better way is trading oil stocks companies involved in oil extraction, production, distribution and refinery.
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*Trading in financial markets carries a significant risk of capital loss.
Oil ETFs offer investors a direct way to gain exposure to the price swings in oil without buying or storing the commodity in physical terms. Moreover, one can avoid the complexities involved with investing in oil futures contracts with oil ETFs.
Most traded oil ETFs are
United States Oil Fund LP (USO)
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
United States Brent Oil Fund (BNO)
iPath Pure Beta Crude Oil ETN (OIL)
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
Invesco DB Oil Fund (DBO)
The main purpose of a benchmark in the oil market is to serve as a reference price for buyers and sellers of crude oil. Oil benchmarks are often quoted in the news as the price of oil:
Brent Crude: Brent is the most widely referred oil benchmark globally with two-thirds of oil contracts using it as a benchmark. OPEC, the organization of 13 most powerful oil exporting nations, utilize Brent as their pricing benchmark.
A sulphur content lesser than 0.5% is considered sweet. Brent crude oil has a sulphur content of 0.37%. The lower the sulphur content of an oil, the easier it is to refine, making it more attractive. Brent is considered ideal for diesel.
West Texas Intermediate (WTI): WTI continues to be the main benchmark for oil consumed in the United States. It is also marginally "sweeter" than Brent. WTI has a sulphur content of 0.34% and is considered ideal for gasoline. Moreover, WTI is the fundamental commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract.
Dubai Crude: Dubai Crude is categorised as a medium sour crude by the crude oil industry. Dubai oil is used as a benchmark as it is immediately available. Dubai oil typically acts as the benchmark for pricing oil exports to Asia.
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