Contracts for difference are traded on a range of commodities as an alternative to directly investing, and one of the most popular bases for CFD commodity trading is oil. Global oil trading is big business across most forms of investment - from oil futures to spread betting on oil prices, investors go mad for oil, and with good reason.
Oil is arguably one of the most essential commodities for modern daily life, playing in to so many different markets, products and services, and as a result, its demand is consistently strong.
Added to strong demand is the fact that oil supply is limited, both naturally and artificially by the oil producing nations and governments to ensure that those who need oil can get it and to prevent unnecessary stockpiling.
As a result, trade in oil can be particularly volatile, especially given the geopolitical circumstances of many oil producing nations, allowing investors access to a raft of earnings opportunities in the oil markets.
Why Trade Oil CFDs?
Trade in oil as a commodity is essential for many end users, such as fuel companies and plastic manufacturers, but it is also a commonly traded base for commodities and derivatives traders.
Contracts for difference on oil are no less popular, and in fact, for several key reasons, may represent a more cost-effective, more profitable way to invest in the oil markets.
Contracts for difference are margined products, thus they enable traders the ability to engage with the oil markets to a larger extent than their trading capital would otherwise allow.
How to trade CFDs
Thus, instead of buying one or two barrels of oil directly, traders can buy contracts for difference on lots of 100 barrels at a time, up to a value many multiple times more than their available investment capital. With margin requirements often around the 5% mark, this means as much as 20-times the return, simply by trading the same position in oil through CFDs.
Another good reason for trading oil through CFDs is that it is one of the most practically effective ways to take a short-term position in the oil market, and at any rate is a flexible investment product that can be applied in a number of different scenarios.
With lower barriers to entry than directly investing in the market, and no end date on the contract (as with futures), CFDs are flexible enough to be traded as both a cost-effective short-term transaction and a highly leveraged and, ideally, profitable long-term position, depending on the market outlook.
Who Trades Oil CFDs?
Oil is traded by all types of investors, funds and even end users, and oil CFDs are no different. CFDs on oil can often be used as a hedging device, in addition to a tool for speculating on oil prices, thus the applicability of oil CFDs is widespread.
Private investors trade oil CFDs to reap the benefits of cheaper transaction costs and leverage, while also helping to work around the technical difficulties of physically trading oil.
Similarly, hedge funds and institutional investors take CFD positions on oil to ramp up their potential earnings from smaller price fluctuations, allowing them to earn more from their oil positions than might otherwise be the case.
As a means of hedging against the cost of fuel, for example, oil CFDs are also particularly useful to those who depend on the price of oil as part of their business - including those that don't traditionally trade the markets as part of their day to day activities.
While this is just one example, the use of CFDs to hedge against oil prices, or to hedge against exposure to other markets in a cost-effective, leveraged way, makes CFDs on oil practically important instruments for speculators of all types.
How To Trade Oil CFDs Effectively?
Oil trades in response to a number of external market factors, and in comparison to certain other commodities is one of the more responsive.
From civil war in oil producing nations through and change of government policy in pipeline carriers, through to rapid increases in production and escalating demand from growing economies, the demand and supply situation for oil is one that is constantly changing, and as a result there are a huge number of factors that come to bear on oil pricing.
Perhaps the most effective way to trade oil prices is through a combination of current affairs awareness and graphic analysis.
Because oil prices can be triggered in either direction by a variety of unexpected events and pressures, having a full 360-degree picture is more important in trading oil effectively than with many other commodities and instruments.
For this reason, effective oil CFD traders frequently set tight stops underneath their positions to prevent rapid changes in price from eating in to their other positions.
By setting a limit on your losses with oil CFDs, you will be best placed to take advantage of the benefits of trading with contracts for difference while also handling the potential downside risks that come with leveraging in such a volatile, unpredictable asset class.