What is commodity trading?
Commodity trading is an activity that consists of speculating on the price of raw materials such as oil,gold or even sugar.
Oil, gold and natural gas are the most popular commodities, but there are many others:
- Energy: oil, gas
- Agricultural products: corn, wheat, oats
- Industrial metals: steel, aluminium, copper
- Specific metals: gold Silver
The price of raw materials is known to have a significant volatility with the development of monetary policy, geopolitical conditions as well as weather conditions in certain countries. This volatility attracts shoppers who want to speculate on the rise or fall of commodities such as oil.
In trade you can take buy or sell positions a few minutes, a few hours or at most a few days. It must be understood that trading is a purely speculative activity which is practiced in the very short term.
What are the factors that affect the price of oil?
Oil is a very important resource worldwide and is the leading energy resource in the world. Being used globally and at the heart of all geopolitical debates, the price of oil is highly volatile and is affected by many factors which are:
Supply and demand
There request oil production is mainly influenced by global economic growth. When the global economy is in the green, the demand for oil tends to increase. L’offer oil may be higher than the annual average during the summer seasons with the increase in car travel and thus fuel demand. As well as winter with heating requirements.
The supply of oil available in the market is affected by any global shock or disruption, such as a political crisis, rising prices or inflation. When the supply on the market falls, the price of oil rises.
Organization of Petroleum Exporting Countries
L’Organization of Petroleum Exporting Countries (OPEC) plays an important role in determining oil prices, as this organization controls a large part of the world’s oil production and can therefore influence the price of this commodity by increasing or decreasing its production.
The exchange rate of the US dollar
In the markets, the oil price is mainly denominated in dollars so when the value of the dollar rises against other currencies such as the euro, the price of oil may rise even if demand remains unchanged.
Being highly valued in the financial markets can also affect the price of oil traders who buys and sells futures contracts on oil for example.
Before you start trading oil, it is important to understand that the price of oil can be affected by many factors. From one day to the next, the price of oil can behave differently due to a significant economic or political event.
Depending on your knowledge and level of trading, several solutions are available to you for trading oil:
- AND F
- The company’s shares
- Futures contracts
Discover a presentation of each of these solutions:
THAT AND F is Investment funds which are available on the stock markets and which it is possible to invest in from a tax envelope such as Share savings plan (PEA) or Ordinary securities account (CTO). The role of ETFs is to track the price of an index like the S&P 500 or a commodity like oil.
These funds follow e.g. the price of oil itself or several companies active in the oil sector. If the price of oil rises, so will the price of the ETF.
By buying shares in an ETF, you are not actually buying oil, but you are exposing yourself to the price of oil and its volatility.
The company’s shares
Instead of or in addition to ETFs, you can also invest in companies who are active in the oil industry as Total energy And Exxon Mobil. By investing in these companies from a PEA or CTO, you expose yourself to the oil price as well as the company’s performance.
If the price of oil rises, but the company performs poorly, the share price will most likely not rise. Conversely, if the price of oil rises and the company performs well, the share price will rise.
THAT futures contracts is widely used in trading and allows you to speculate on the price of commodities such as oil or gold. A futures contract is a contract that obligates the buyer to buy and the seller to sell a specified quantity of oil at a specified price on a future date.
These contracts can be traded on the stock exchange and require a good knowledge of the financial markets.
THAT CFDs allowing traders to speculate on movements in the price of oil without actually physically owning it or signing a futures contract. The main difference between CFDs and futures contracts is that CFDs are non-binding. With a CFD, you do not commit to buying or selling an amount of oil on a fixed date.
Why trade oil?
Trading oil can be interesting for several reasons. First, trade is an asset volatile, which therefore provides numerous opportunities for traders who wish to anticipate the price movements generated by this volatility. In addition, oil is an asset that makes it possible to to diversify its investments. Oil is not correlated to stock markets or cryptocurrencies and can therefore allow you to diversify your investments. Oil plays one important role around the world supplying many industries such as transport and industry. This global importance offers numerous investment and trading opportunities.
Last but not least, oil is readily available! Any individual trader can trade oil if they wish.
Which ETF for oil?
Here are the ETFs available in the market that allow you to speculate on the price of oil:
|Xtrackers Brent Crude Oil Optimal Yield ETC
|United States Petroleum Fund
|Lyxor STOXX Europe 600 Oil & Gas
|iShares STOXX Europe 600 Oil & Gas UCITS ETF
With these ETFs, you can gain exposure to the price of oil as well as companies active in the oil sector.
Which platforms to trade oil?
It is possible to trade oil on the most popular brokers such as:
From these platforms you will be able to take a position on futures contracts or directly on oil and trade while using leverage if you wish.
Technical analysis of oil
After a meteoric rise during the covid-19 pandemic, oil prices fluctuate between 70 USD and 90 USD since the end of 2022. Since July, the price of oil has been increasing due toinflation.
Trading oil: our opinion
The price of oil can be affected by many factors such as‘Supply and demandL’inflation and dollar exchange rate E.g. Which provides many opportunities for traders.
Oil is the raw material more monitored on the market and it can be interesting to shop there. Our position on oil trading is therefore that it is an asset that can be interesting to integrate into a global strategy.
Do your own research and choose a strategy that works for you.