Hello there, this is tradingpedia.com and we continue our series dedicated to the oil price. The aim was to present everything there is to know about the retail oil market – the basic understanding of oil in the economy.
We have discussed so far, the uses of oil and how to interpret economic releases. Also, we have looked at how particular countries are influenced by changes in the oil price, and how geopolitics influences the price.
But how to actually trade oil – can you do it? It depends on the broker and the type of the account used. Many types of oil exist, and the most popular ones are the WTI – West Texas Intermediate, on the screen here at $41.05/barrel and we discussed what can be obtained from one single barrel of oil.
Types of Oil
The different types of oil refer to the oil density and structure. Brent oil is another type of oil, a blend from the North Sea, while WTI comes from Texas, United States, one of the highest quality in the world.
The WTI is the underlying commodity on the Nymex oil futures contracts. Keep in mind this one – oil futures contracts as we will discuss it soon.
How to Trade Oil
When you trade with a regular FX broker, you do not actually trade, buy or sell, oil on the market. More precisely, you do not actually own a barrel of oil. What you do is you trade a financial product, a CFD – Contract for Difference.
Let’s say the price of oil should move to the upside due to this horizontal correction. Maybe it forms even a pennant formation here. For whatever the reason, we may decide to buy oil here as the pennant has a measured move equal to this move, projected from the moment it ended and the price could reach $50.
But this is a trading strategy for a CFD. It is just a financial product. You speculate on the future price of the WTI. That’s pretty much it. If you buy the Dow Jones or the S&P500, those are CFDs too at FX brokers.
Brent Crude Oil Price vs the WTI Price
Another important thing is the crude oil “prices”. There are different prices for different types of oil. This is the Brent crude oil price, different from the WTI price. If you look at different oil prices, while they differ, a correlation does exist.
It helps looking at different crude oil prices as sometimes some patterns are visible on one chart, but not on the other. For instance, the pennant is visible on the Brent oil chart, but also on the WTI. However, in April, the dip is only to $6 in April. In reality, on the futures market, it was -$40. Also, the Brent oil formed here an inversed head and shoulders pattern – a reversal pattern, with the measured move projected from the neckline.
However, it does not appear on the WTI chart. It is a reversal pattern seen on this CFD, not on the actual futures market. On the actual futures market, the price collapsed well below the zero level. Therefore, make sure you know the product you are actually trading. Thank you for being here and let’s move to the last video of this series dedicated to oil – bye, bye.