An Introduction to Trading Crude Oil

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An Introduction to Trading Crude Oil

Crude oil is a commodity and the market is one of the largest in the world. Traders include large multinational companies and investment funds as well as smaller retail traders. A significant percentage of all the oil traded is produced by OPEC (Organisation of Oil Producing & Exporting Countries).

Oil is traded globally on future exchanges and two of the largest are the New York Mercantile Exchange, commonly referred to as NYMEX, and the Intercontinental Exchange, otherwise known as ICE. Future trading, spread betting or CFD trading relating to the futures exchanges requires access to a personal computer, a trading platform and a fast and reliable internet connection.

Oil prices rise and fall over time and understanding how events will affect the price of the commodity is important if you wish to successfully trade or speculate on its price. Oil prices are commonly determined by a range of factors, including its purity or grade, the location of its extraction and consequent exporting costs, its storage and treatment costs as well as the global economy and news events.

Demand for oil is chiefly driven by the United States, China, Europe and other highly developed industrial economies. A drop in demand will result in falling prices. In a recession or financial crisis for example, the demand could fall significantly.

Conversely, in periods of strong economic growth and strength, oil prices will often increase, sometimes quite rapidly. Investors speculating on oil prices can also influence the markets and were blamed for the record prices that were set in 2008

A crude oil futures option entails the ability to buy or sell 1,000 barrels of oil at a predefined price by an expiration date. The futures option is priced with a premium for the right to buy or sell before a given date.

Oil futures options can be risky, as the price of oil may not be at the required level by the expiration date for a profit to materialise. As a result, a crude oil future options trader could potentially lose the total amount of his or her initial investment.

Two types of traders, hedgers and speculators, commonly drive commodity trading. Hedgers look to hedge their investments or trades by engaging simultaneously in the underlying oil market as well as the future exchanges. Should the market move against a hedger in the underlying market, a safety measure or hedge, can be placed in the derivative market by speculating the other way.

Crude oil speculators are essentially concerned with the direction of the price of the commodity. Speculators can spread bet on crude oil with companies likeIG Index or trade CFDs on the price of oil. With either product you have the advantage of being able to speculate on both rising and falling markets.

Spread Betting and Contracts for Difference trading are geared forms of trading, these products come with a high degree of risk and you can incur losses that are in excess of the initial amount of money that you invested. Always trade with funds that you can afford to lose; before trading ensure that you fully understand the risk when investing with these investment formats, they may not be suited to your trading requirements so where necessary seek impartial trading guidance.

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