Choosing a trading Instrument: how to trade CFDs on energy commodities

21.06.2021

Feature articles

Energy commodities is one of the most popular trading instruments in the Forex market. Oil has firmly held the palm in terms of trading volumes for many years. To trade energy successfully, you need to have a clear picture of how the commodity market works, know its structure, the main players and the factors influencing the prices formation. These exact issues we will cover in the final article of how-to-trade series. Let's start!

Oil trading features 

The energy market influences the entire global economy dramatically. Oil and gas are widely used in various industries, which helps to maintain a constant demand for them.

Crude oil is one of the world's main energy sources and the most widely traded commodity. If you ask yourself what is produced today without the oil, then it is easier to make a reverse list. It is not for nothing that it is called black gold.

The main features of oil trading: low entry threshold, simplicity of long-term forecasting, high volatility.

Many currencies and commodities are directly dependent on oil prices in Forex. It helps in determining trends a lot. US dollar is very clearly correlated with the oil price, which makes it possible to literally “play ahead”.

Factors affecting oil prices changes 

 As we have already mentioned, prices for any asset change in accordance with the supply/demand ratio. No other asset can boast the same number of buyers and sellers as the oil market. This is what gives investors the opportunity to make money on the difference in quotes. The level of supply and demand, in turn, is influenced by many other factors:

  • changes in the global economy growth rate (especially the GDP of the United States and China)
  • political situation in the main oil-producing countries
  • weather conditions
  • natural disasters 
  • changes in oil reserves in storage
  • OPEC oil production policy

The dynamics of oil prices is highly important. When oil prices rise, the cost of petroleum products rise as well. This, as a rule, creates higher inflation and higher interest rates. In the same vein, lower oil prices stimulate economic growth by making goods more affordable. The more actively the economy grows, the higher the demand for energy resources.

Main oil types 

The benchmark is Brent and WTI (West Texas Intermediate). Their price depends on the outcome of international exchanges trading. Prices for other marks are calculated according to reference brands.

Brent serves as the price standard for Europe and the OPEC countries. About 70% of world oil supplies are estimated in relation to it. In fact, Brent is a mixture of oil from several fields in the North Sea (Brent, Forties, Oseberg and Ekofisk). Interestingly, the reserves of the Brent field itself have already been depleted, but the name has survived.

WTI, or Light Sweet Crude Oil (CL), is produced in the USA, Texas. Traditionally, WTI quotes are slightly lower than those of Brent, because the extracted resource is slightly inferior in quality.

Oil trading strategies

The energy commodities market has its own set of particularities, which must be taken into account in order to make money effectively. First of all, it is the speculative nature of transactions. The price of oil can artificially rise or fall over time, so using only traditional mechanical indicator-based strategies isn't a best option. They must be combined with fundamental analysis.

A good oil trading strategy includes:

  • Fundamental analysis
  • Technical analysis
  • Risk management rules

First of all, a trader needs to learn to understand the fundamental factors that affect the  supply/demand ratio. After that, the situation can already be analyzed with technical analysis tools that will help you find the correct market entry points. And, of course, one should never forget about the rules of risk management.

Every trader planning to trade oil assets, must not only constantly monitor the economic calendar, but also check the regular reports of OPEC, the American Petroleum Institute (API), the Department of Energy (DoE), the Energy Information Administration (EIA) and Baker Hughes on the number of operating rigs in the United States. These reports are released monthly or weekly at the same time. You need to study them as soon as possible, before the information has lost its relevance. Before the release of key reports, it is better not to deal with oil.

A combination of several indicators can be used as technical analysis tools. For example, the Moving Average indicator is good for determining the trend direction, and the MACD indicator will tell you where to buy and sell assets by analyzing the intersection of signal lines.

  • To buy oil, the price must be ABOVE the Moving Average level. As soon as such a moment has come, you need to wait for the downward movement as well as for the formation of a buy signal on the MACD indicator.
  • To sell oil, the price must be BELOW the Moving Average level. As soon as such a moment has come, we wait for the price correction to the Moving Average level and look at the intersection of the MACD indicator lines.

Gas trading features

Trading features are almost the same both for gas and oil trading. The same factors of influence, price dynamics and trading strategies. Often, the gas price changes, following the trajectory of the oil price. Also, the quotes of the NG may change in accordance with gold or the US dollar. It’s important to analyze the size of gas reserves, climate changes in countries that produce this resource. The biggest supplier of natural gas is Russia. 

With Grand Capital, you can trade both WTI (WTI) and Brent (BRN) benchmarks, as well as Natural Gas (NG). The high amplitude of price fluctuations will open unlimited opportunities for entering a position and concluding a profitable deal for investors with any investment capital.

Start energy commodities trading

So, we have told you about the peculiarities of trading with all the assets available in the Forex market. Now you can effectively correlate your goals and opportunities with the proposed conditions in order to make trading as profitable as possible. We hope that after reading a series of articles on choosing trading instruments, the answer to the question “To trade or not to trade” has become a little clearer for you.

 

Start trading

 

Author: GC
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