How to trade the oil price

How to trade the oil price

How to trade the oil price: which instruments can you trade to get exposure to this?

The future direction in which oil markets will trade is a hot topic, having put in an approximate 55% fall from 30 June 2014 until the end of January 2015. Oil went from being a commodity driven by demand and supply to being one driven by fear and exuberance. We haven’t gotten to the exuberance part yet, but tough talk from Saudi oil ministers of stomach-able US$20 per barrel oil prices certainly did a great job of prompting fear from traders; and the significant and swift falls that ensued really changed the landscape of the global economy in a short space of time.

So with these dramatic falls having taken place, many traders will now take positions to either benefit from a bounce or benefit from further falls in the price of oil. But what is the best way to express these bullish or bearish crude oil views?

For a pure trade on the oil price, one would look to individual oil futures contracts. The two most liquid, tradeable benchmarks for oil are West Texas Intermediate crude (known as WTI) and North Sea Brent crude (known as Brent). In recent times, WTI has traded at levels lower than Brent, due largely to the fact that the US has high levels of surplus oil and gasoline inventories, and therefore there is greater supply in this market. In general, however, a negative view on either WTI or Brent independently will have the same effect, so traders can choose at their discretion.

If one is using a CFD platform, be sure and check with the CFD provider about the name of the market on their platform. For instance, in the Rivkin Trader platform, WTI futures CFDs are known by the name OILUS and Brent futures known as OILUK. As a rule, pick the ‘front month’ contract, being the one that has the closest expiry date. At the time of writing, this is March 2015 for both benchmarks on the Rivkin Trader platform, as shown in the below sample trade ticket.

There are two other ways that traders might like to take a view on oil. First, using the same contracts, one might like to trade the ‘spread’ between WTI and Brent. So if, for instance, one felt as though surplus supplies in Brent oil markets might increase at a greater pace than those in the US, one might sell Brent crude and buy WTI crude in equal amounts, predicting that the gap between the two prices might narrow. This would be known as a market-neutral trade, because irrespective of whether oil goes up or down in general, you are simply taking a view on the widening or narrowing spread between the two prices. Second, you can take a view on oil via the stock market.

If you’re wishing to take a view on the oil price but you’d prefer to use shares, you have two options:

  1. Buy a ‘long’ or a ‘short’ oil exchange traded fund (ETF) – there are many these funds listed on the Rivkin Trader platform and traders will often go with the big names like Blackrock’s iShares, Vanguard or State Street’s SPDRs. You can browse the thousands of ETFs on Rivkin Trader by opening a demo account for free.
  2. Take a corporate view by buying or shorting an oil company’s shares. This takes a little more knowledge, as there are explorers, producers and refiners within this industry, among others. If one took a negative view on Caltex (CTX) last year, for instance, they will have done very poorly, as Caltex benefited from a short-term spike in margins as they bought crude cheaply and took their time dropping the price of gasoline prices. Woodside Petroleum (WPL) on the other hand suffered, and Horizon Oil (HZN) was hammered given their dependence on a higher sale price for crude – so buying HZN now would be a highly leveraged bet on a recovering oil price.

There is no doubt that this is a tempting trade for those looking for an exciting outcome, but one might like to consider that oil could trade sideways for quite a while now. OPEC has talked the price down significantly, but they may want to keep it here for a while so the world remembers what will happens when they don’t cut supply due to falling prices, as is usually the case.

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