CFD trading on the oil price
Oil is seen by many investors and traders as an interesting product with a lot of potential. This is mainly due to the fact that the oil price can fluctuate a lot. Many traders see numerous possibilities with this interesting product on a daily basis.
In addition to the fact that the oil price is interesting for investors and traders, many non-investing citizens are also confronted with the height of the oil price on a daily basis. For example, think of the situation where you are at a gas station and find out that the price of gasoline has increased. The oil price is therefore not only relevant for people who would like to make a profit on it. This makes oil an interesting product that stands firmly in today’s society.
Are you interested in making a profit based on the oil price? Below you will find useful information about this. It will also be discussed how you can make optimal use of the price fluctuations with a CFD on the oil price .
Crude oil: what is it?
Crude oil is a refined crude oil. This type of oil is also called ‘Brent crude oil’ or ‘WTI crude oil’. This refined crude oil consists of a composition of several organic materials. It serves as a basis for the production of various products and substances. Think for example of plastic, medicines, fertilizers and of course gasoline and diesel.
You will probably use many of the above products on a daily basis. The example of petrol at a petrol station was mentioned earlier. As mentioned, crude oil is also an important element in the production process of plastic. It hardly needs any explanation that we encounter a lot of plastic on a daily basis. The relevance of crude oil means that many economists and investors are interested in the price trend . The dependence on this oil is not small.
The price of oil in relation to the economy
Now that it has become clear that the oil price is closely related to the economy, here is a further explanation. Basically, it works like this:
Is the price of crude oil rising? Then the (daily) costs of consumers will rise. This can be both direct and indirect. For example, you notice it directly at the pump. Indirectly, you notice it when (plastic) products become more expensive.
Is the price of crude oil falling? Then it will be bought cheaper by large companies. As a consumer you will notice that products will become cheaper both directly and indirectly. From an economic point of view you could then say that purchasing power increases. After all, you can buy more with the same money. This stimulates economic growth.
How much a consumer notices a change in the oil price varies from case to case. For example, a higher oil price will not immediately lead to more expensive products containing plastic. It is therefore more relevant to look at the trend. If oil becomes structurally more expensive, higher prices will become more noticeable.
In addition, it should be said that the oil price is not a bottomless pit. When oil prices show extreme drops, countries that produce oil will in most cases intervene (strongly). They usually do this by artificially playing on the economic system of supply and demand. This usually means that they reduce production, so that the supply also decreases. The price will then rise again, because the demand remains the same as before.
Price movements offer opportunities
Just as surfers need waves, many investors and traders need price movements to see effects. Price movements provide perspective; a framework for making a profit. In traditional practice, this means that investors buy oil at a low price and then sell it at a higher price. Why is this traditional? Nowadays, more and more people trade with modern CFDs. With CFDs, you can also profit from downward fluctuations. So you can also try to make a profit when you buy a CFD on oil at a high price and sell it again when the oil price has fallen. In this way, you make optimal use of all price movements. Read more about the advantages of CFDs .
Whether you speculate on a fall or a rise in the price, the idea remains the same. You try to make a profit by taking a risk with a part of your trading capital. You do this by speculating on future fluctuations (price movements).
CFDs on the oil price
Most people who invest in oil do so by means of CFDs. CFD stands for ‘contract for difference’ and it may be called a derivative. This means that you do not actually take possession of the underlying product – in this case oil. You only conclude a contract to settle the price difference between the purchase and the sale moment. Because of this construction, CFDs offer many advantages.
Above we have already briefly discussed that CFDs offer you the great advantage that you can speculate on both a price decrease and a price increase. So you can go both short and long . In practice, this offers many possibilities.
Another big advantage of CFDs is that you can use leverage ; also called multiplier or leverage. Leverage is intended to increase the scope of your position. Leverage ensures that you trade with more money than you actually invested. For example, if you invest 50 euros and use a leverage of 10x: then you are trading with 500 euros, as it were. This means that you can make (much) more profit, but you can also make (much) more loss. You should therefore be aware of the risks associated with CFD trading .
Analyze
When you are considering opening a position to try to make a profit on crude oil, you should first estimate how much potential that position has. You can make such an estimate based on an analysis. You could distinguish two ways of analyzing:
Fundamental analysis:
This involves conducting market research based on (macro) economic data. Think of important publications and reports, or important news events. Based on this information, you could assess the supply and demand of crude oil.
Technical analysis:
This is a somewhat more complex method of analysis. It involves analyzing the price of crude oil. You do this by analyzing price charts such as the one below for patterns and specific indicators that could indicate what the price will do in the future.
What analysis for CFDs on the oil price?
Which of the two methods should you choose? That is something you need to decide for yourself. It may be reassuring to know that it is also possible to use both methods of analysis simultaneously to gain some more certainty towards a successful analysis .
Thus, things that stand out on the basis of fundamental analysis will eventually be found in the price with a technical analysis. The idea behind technical analysis is that all relevant factors are already included in the price itself. If you choose one method, you could use the other method as confirmation.
Finally, it should be said that trading in oil is not entirely risk-free, especially not with CFDs on the oil price. Of course, this applies to all investment products. What makes oil so special, however, are the sometimes very fast and strong price movements. It is therefore often said that the price of crude oil is very volatile . It is wise to analyze your chances well and to cover yourself well. You can cover yourself, for example, by setting a stop loss. This stop loss will ensure that your position is automatically closed when it reaches a (self-determined) price level.
Investing in oil with a broker
Did this blog make you enthusiastic about investing in CFDs on the oil price? Whether you prefer to do this with CFDs, shares or another investment product, it is smart to make the right choice for the most suitable broker. Use our comparison tool and choose the broker that suits you best!
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