Trade Crude Oil On High Leverage Up to 500: 1

Oil Prices and Inflation are Joined at The Hip
If demand for oil rises, so do prices at the rigs through to the petrol pump, then consumers feel the pinch as they have less disposable income. Conversely, lower oil prices are considered deflationary (or disinflationary if the rate of inflation slows without going negative). Therefor traders, analysts and economic modelers keep close tabs on oil prices to help assess likely central bank policy by gauging inflationary forces.

Two of the most popular markets for oil traders are WTI and Brent crude, both of which are on offer via ThreeTrader on the MT4 platform.

West Texas Intermediate (WTI)
WTI is a grade of crude oil which comes form oil fields within the US. Considered a ‘light sweet’ crude due to its low level of Sulphur and low density, it can be turned into gasoline and diesel fuel and is a major benchmark for oil pricing. Traded on the New York Mercantile Exchange (NYMEX) it is considered to the most liquid oil futures contract and typically trades over one million contracts per day.

Brent Crude
Brent is another form of crude which is drilled mostly from the North Sea oilfields. Despite its location, Brent crude also trades in USD but is settled in cash, not physical barrels like WTI. Traded on the Intercontinental Exchange (ICE) in London, Brent is used as a benchmark to price around two thirds of global oil prices. Whilst Brent is also considered a ‘light sweet’ crude, it has a slightly higher Sulphur content which means WTI is the sweeter of the two.

Key Drivers for Oil Markets

Oil and volatility are no strangers. Whilst oil prices meandered between $10-$30 per barrel between 1986-1999, price rose to a high of $147 in 2008 and have shown their ability to rise or fall quickly under the right circumstances over a period of days, months or even years.

Whilst there are many fundamental drivers for crude oil, here we cover some of the basics which traders and investors are likely to take note of.

Supply and Demand:
Like all commodities, oil prices are sensitive to supply and demand and they can make an impact across all timeframes of various degrees.

For example, growing demand helped oil prices rally over 1,200% following the Nasdaq bubble in 1999 as global growth accelerated. If growth is expansive, supply chains are kept busy as consumption rises and oil is needed to fuel the transport from miners, producers through to resellers and retailers.

Of course, the reverse is also true. During recessions, a lack of consumption kills demand and weighs on oil prices. A recent example is evident with the global lockdowns due to the covid-19 pandemic, which saw oil prices plunge to zero and futures hit negative prices. Only recently, the thought of this event was almost unthinkable.

As for supply shocks, an unexpected attack on an oilfield can send oil prices soaring if the damage is large enough to disrupt the supply. A recent example was seen in September when drones attacked a Saudi oil facility over the weekend, resulting in WTI gapping 12% at the Monday open.

Organisation of the Petroleum Exporting Countries (OPEC):
OPEC, often referred to as an oil cartel, were formed in 1960 and originally consisted of 5 members; Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Over time they have expanded to 13 members who aim to control oil prices by changing the output of oil of members.

By cutting production they effectively limit the supply with the intention of either supporting or raising the price of oil. And by increasing production OPEC aims to lower prices or take the heat off-of rising prices.

As it is estimated that OPEC control around 75% of global crude oil reserves and around 42% of total crude output, traders focus on their meetings where they announce their actions.

Economic Data:
Oil traders keep an eye on the usual macro-economic data sets such as GDP, industrial production, CPI and PMI surveys to keep tabs on global growth and potential consumption (demand).

However, there are also oil-specific indicators which traders focus on. This list is not exhaustive.

• The American Petroleum Institute (API): They release a host of weekly data sets that help traders assess demand and supply. One of the most popular is the “Crude inventories” which looks at the mount of stored oil. Other examples include gasoline inventories, crude imports, Cushing number and crude runs.
• The International Energy Agency (IEA): Representing America’s oil and natural gas industry, they release the weekly and monthly statistical bulletins (WSB and MSB) to show demand and supply for transport fuel (among others).
• Baker Hughes Rig Count: This data set shows the amount of oil rigs actively drilling for oil. The North America version is released weekly and the international edition is released monthly.
• Commitment of Traders Report (COTR): A weekly report which shows market positioning of futures markets, oil traders look at how hedge funds, brokers and professional traders are positioned on oil (net long or short).

Geopolitics:
Oil prices and geopolitics go hand in hand. With Saudi Arabia remaining to be the world’s largest oil exporter, tensions in the Middle East often have an impact on crude oil markets. We have also seen tensions with Iran, neighboring states and the US resurface in recent months which has seen volatility return to oil. And the fact that the US is now a next export or oil thanks to the shale industry, we doubt geopolitics will veer too far away from oil any time soon.

Long example: Buying WTI
A trader has a bullish view on WTI (expects it to trade higher) so enters long position and buys ten contracts at $37.75. Each full contract is equivalent to 100 barrels of oil, so the trader is effectively long 1,000 barrels of oil (10 x 100).

• If WTI rises to $42.50 a barrel, the trader could exit for a profit of around $4,750
  • (# contracts x contract size) x (exit price – entry)
  • (10 x 100) x ($42.50 – $37.75) = $4,750

• If WTI falls to $34.00 a barrel, the trader could exit for a loss of around -$3,750
  • (# contracts x contract size) x (exit price – entry)
  • (10 x 100) x ($34.00 – $37.75) = -$3,750

• A 5% margin requirement with 20:1 leverage requires $1,887.50 of capital
  • (# contracts x contract size x price) / leverage
  • (10 x 100 x $37.75) / 100 = $1,887.50

Short example: Selling Brent
A trader has a bearish view on Brent crude (expects it to trade lower) so enters short position and sells five contracts at $40.50. As each contract is equivalent to 100 barrels of oil, the trader is effectively short 500 barrels of oil (5 x 100).

• If Brent falls to $35.20 per barrel, the trader could exit for a profit of around $2,650
  • (# contracts x contract size) x (entry – exit price)
  • (5 x 100) x ($40.50 – $35.20) = $2,650

• If Brent rises to $44.00 per barrel, the trader could exit for a loss of around -$1,750
  • (# contracts x contract size) x (entry – exit price)
  • (5 x 100) x ($40.50 – $44.00) = -$1,750 

• A 1% margin requirement with 100:1 leverage requires $202.50 of capital
  • (# contracts x contract size x price) / leverage
  • (5 x 100 x $40.50) / 100 = $202.50

Costs Associated with CFDs

Spread:
The spread is the difference between the bid and the ask price and is a nominal transaction cost to enter the trade.

The spread is variable, and its width is driven by liquidity (trading volume). This means we can offer tighter spreads during periods of heavy trading activity, such as when the European or US markets are open. Although the spread can widen during quieter periods such as the Asia session of bank holidays (assuming the underlying market is open).

Swaps:
Swaps are effectively a credit or a debit on open positions, calculated daily and based on a countries interbank rate. As our OIL CFDs are traded in USD, swaps are also calculated in USD. 

Whilst there are only 5 trading days in a week, swaps are calculated for 365 days a year. This means traders should account for a triple swap day, where the weekend is accounted for.

As spot oil markets generally settle after 2 days, swaps on CFDs are calculated on a Wednesday so can either expect a triple debit or credit on this day.

You can access swaps via the MT4 terminal ‘Market Watch” window, by right clicking over the CFD and selecting “Specification”.

Commission (Pro Account):
You can trade a full contract of WTI or Brent from just 70c per full contract (35c to enter and 35c to exit the trade). And as the commission is added, it allows us to offer a tighter spread. Please note, there is no commission on a Standard Account.

Speculate in bullish and bearish markets
Being able to trade long and short is not always possible in the underlying market. Futures contracts are limited to the amount of trader groups at one time, and can hit what s know as ‘limit up’ or ‘limit down’, which can prevent new traders entering the market or traders with open positions from entering their trade.

Trade on Margin
By providing generous levels of leverage up to 100:1 on oil CFDs, margin requirements are kept low. This allows portfolio managers to increase market exposure with a smaller collateral and keeps traders further away from margin calls.

Avoid Contract Expiry and Rollovers
With CFDs you can focus on the direction of the market without having to calculate rollover costs or when a futures contract expires.

Hedge an Oil Future, ETF of Group of Stocks
Traders sometimes like to hedge their positions. A fully hedged position means you have a trade of equal value to the original position but opened in the opposite direction. This allows them to lock in a profit or limit a loss if they want to temporarily reduce risk from their trade.

• Perhaps they are bullish on WTI over the coming weeks but are concerned that rising geopolitical tensions could weigh on oil prices over the weekend, so they hedge their position over the weekend.
• If an investor trades futures markets, they can hedge against that position with just a fraction of the margin required of their futures trade.
• If a trader is short a collection of oil stocks, they could hedge their bearish portfolio by opening a long WTI or Brent CFD to lock in a profit and protect themselves from a rising stock market.

Fast Execution:
Tight spreads and low commission won’t mean much if you can’t enter or exit a trade without unnecessary delays. ThreeTrader offers a fast execution service, making it appealing to intraday oil traders, whether they are discretionary traders or us expert advisors (EA’s).

Generous Leverage
With leverage up to 100:1 on our oil CFDs, margin requirements remain low which makes oil trading easier to access.

No Commission (Pure Spread Account)
Trade commission free on a Pure Spread account and just pay the spread to enter a trade.

Low Commission (Raw Zero Account)
Trade a full contract of oil with just $4 commission per full contract(1000 Barrels). Raw Zero accounts also come with a raw spread, making it ideal for intraday traders.