Trading Crude Oil – A Beginner’s Guide
FX Leaders provides outstanding trading signals on WTI crude oil (USOIL). WTI is the abbreviation for West Texas Intermediate.
Oil extraction in Texas.
Crude oil is an exciting and volatile instrument to trade, with large movements in short periods of time. With greater volatility comes more risk when trading, but if you employ proper risk management alongside a sound trading idea, like using our WTI trading signals, a lot of money can be made with black gold.
Countries With the Largest Oil Reserves
he Middle East is incredibly rich in oil reserves, and a substantial part of the world’s oil is trapped in this region.
However, the country with the largest proven oil reserves in the world is Venezuela. Let’s look at which nations have the largest reserves of unextracted oil as of 2022, according to BP:
- Venezuela: 303.8 billion barrels, or 17.5% of the world’s supply.
- Saudi Arabia: 297.5 billion barrels, or 17.2% of the world’s supply.
- Canada: 168.1 billion barrels, or 9.7% of the world’s supply.
- Iran: 157.8 billion barrels, or 9.1% of the world’s supply.
- Iraq: 145.0 billion barrels, or 8.4% of the world’s supply.
- Russia: 107.8 billion barrels, or 6.2% of the world’s supply.
- Kuwait: 101.5 billion barrels, or 5.9% of the world’s supply.
- United Arab Emirates: 97.8 billion barrels, or 5.6% of the world’s supply.
- United States: 68.8 billion barrels, or 4% of the world’s supply.
- Libya: 48.4 billion barrels, or 2.8% of the world’s supply.
In other words, these 10 countries make up 86.4% of the world’s oil reserves.
History and Background of Oil Extraction and Consumption
Now that we know where the most ‘black gold’ is found, let’s briefly look at where and when oil was first extracted in large quantities.
In 1859, a man drilled a hole on a farm in Pennsylvania and struck oil at about 70 feet. The oil quickly filled the hole.
Since that day, oil extraction quickly increased in the region, and three years later, oil entrepreneurs were extracting this commodity at an annual rate of about 3 million barrels.
Back then, only a specific part of the unrefined oil was utilized – kerosene, which was used for lighting.
Soon after Thomas Edison invented the incandescent light bulb in 1879, the demand for kerosene and, subsesequently, oil began to deteriorate.
Soon after this, however, cars driven by internal combustion engines appeared on the scene. The demand for gasoline surged, and within a decade, it was selling faster than kerosene.
A Model T Ford from 1925.
By 1956, Americans owned more than 50 million cars. The demand for gasoline was driving oil extraction activities at a rapid pace. Military exercises also consumed a lot of oil as the war in Vietnam picked up.
Of course, oil extraction wasn’t limited to the United States alone. As the demand for oil increased, oil extracting activities spread to many other places in the world, including Mexico, the Middle East, Canada, and Russia.
Today, millions of barrels of oil are extracted daily to supply the world’s massive energy demand. In 2022, oil demand stands at 97m barrels per day globally. This equates to 5 barrels of oil per person a year.
Let’s take a look at which countries produce the most oil.
Top 10 Biggest Producers of Oil (Updated August 2022)
1. USA – 14.83 million barrels per day
2. Saudi Arabia – 12.4 million barrels per day
3. Russia – 11.26 million barrels per day
4. China – 4.82 million barrels per day
5. Canada – 5.27 million barrels per day
6. Iraq – 4.44 million barrels per day
7. Iran – 4.37 million barrels per day
8. United Arab Emirates – 3.77 million barrels per day
9. Brazil – 3.24 million barrels per day
10. Kuwait – 2.99 million barrels per day
How to Trade WTI Crude Oil
Although there are other ways to trade oil, we’ll focus only on how it’s done on retail forex trading platforms.
Crude Oil Lot Size
When trading crude oil, the minimum trade size is usually a 10-barrel contract, with some brokers even enforcing a 100 or 1000-barrel minimum. Other brokers might even offer a 1-barrel contract. This isn’t very common, however.
A crude oil position of 10 barrels would cost you $800 to open if you didn’t have access to leverage. That is, at a price of $80 a barrel.
Some brokers offer 1:500 leverage on crude, although financial restrictions in many countries limit the amount of leverage you can use. In the UK, for example, it’s 1:30. In the U.S., the maximum is generally 1:50, although this can vary. At $80 a barrel, to open a 10-barrel lot in the U.S., you’d need $16 to meet the minimum margin requirements ($80 x 10 = $800, $800/50 = $16).
Of course, you need additional equity to maintain the position once the oil trade is open because any floating loss needs to be supported by your available margin. Immediately after you’ve opened a crude oil position, there will be a floating loss of about 5 pips, which is the spread.
At 1:50, for example, a 2% move would force your position to close without having additional margin to back the position up.
* Did you know that one barrel of oil is 42 gallons (about 159 liters)?
Crude Oil Pip Value
A pip is an incremental price change, with its particular value depending on the market. It’s a standard unit for gauging how much an exchange rate has fluctuated in value.
Most trading platforms consider a pip in crude oil to be $0.01. That means a $1 price fluctuation in the oil price equals 100 pips.
Let’s work with a 10-barrel contract: 10 barrels X $0.01 = $0.10. This is the pip value for trading accounts denominated in U.S. dollars.
This pip value always remains the same because crude oil and the U.S. dollar are paired up, with the dollar being the ‘quote currency’ in the ‘pair’. The calculation and the pip value are the same as with the EUR/USD and the GBP/USD, for example.
This is because of the petrodollar system, in which oil-producing countries agreed to trade oil in U.S. dollars in the mid-1970s due to its widespread use globally. This agreement subsequently crowned the U.S. dollar the world’s reserve currency.
Offshore oil rigs extract oil from deep below the seabed.
Profit and Loss Calculation
Here at FX Leaders, we go the extra mile to offer traders the best forex signals possible. In 2020 alone, we bagged over 4,200 pips!
We’ve been offering crude oil trading signals for over five years now, with great success. In addition to our expertise in other commodities, like gold, our seasoned team produces some fantastic signals in this volatile instrument.
To show you how much profit you could make, let’s look at an example profit calculation using crude oil signals:
Let’s calculate how much you’d make if you bought 200 barrels of crude oil at $80 and hit your take profit at $84.5.
The quickest way to calculate your profit is to multiply the number of barrels you bought by the difference between your take profit and the price at which you entered:
$84.5 minus $80.00 = a profit of $4.5. Multiply this by 200 barrels, and you get a profit of $900!
Many traders like to calculate their profits or losses by multiplying the number of pips (450) by the pip value ($0.10). That number is then multiplied by the number of 10-barrel lots (20) to get a profit of $900. It’s simple to work out, right?
Instruments Correlated to Crude Oil
The oil price usually has a notable effect on the currencies of some of the countries that are, to a large degree, dependent on oil production and exports.
A good example of such a country is Canada, which exports most of its petroleum products to the United States.
The Canadian dollar is usually highly correlated to the traded oil price. A sudden drop or rise in the oil price can, under normal market conditions, easily be noticed in the USD/CAD exchange rate and in the rates of other Canadian dollar pairs.
CAD/JPY, for example, is an interesting pair to trade because Canada is a major oil exporter and Japan is a major oil importer. This causes CAD/JPY to have a decent positive correlation with the price of crude oil.
The Norwegian Krone (NOK) and the Danish Krone (DKK) are also highly correlated to the trading oil price due to their exposure and reliance on oil trade.
Lastly, although AUD is often more correlated to gold, it is also a small oil exporter. This means fluctuations in the price of crude oil will also affect the Australian dollar.
Major Events that Impact the Oil Price
The fundamental driver behind the price of crude oil is supply and demand, like most commodities.
Production and consumption data also impact the oil price. For example, if the United States crude oil inventories reveal that there’s recently been a substantial draw from U.S. energy reserves, we know that energy consumption, and therefore, the oil demand, has increased.
An increase in the demand for oil will put upward pressure on the oil price, except if oil supply increases at the same rate or faster.
Conversely, when data releases show that the demand for oil is waning, it could put downward pressure on the oil price.
OPEC (Organization of the Petroleum Exporting Countries) also has a big effect on price. OPEC essentially controls the supply released by the top oil-exporting countries and will set quotas for production that limit supply, keeping oil prices elevated.
For example, if they decide to cut oil production, it can cause the oil price to rise sharply in a short time as investors and speculators quickly buy oil to profit from the expected rise in the price as supply tightens.
A large oil tanker.
In the past, political factors like the Iran-Iraq war, Arab oil embargo, and the Persian Gulf wars have significantly affected the price of oil, usually putting upward pressure on oil as demand increases from military operations and supply contracts as affected countries stop or limit exports.
In the 1990-91 Persian Gulf war, for example, the price of USOIL traded from $16 to $41 in just three months before crashing back down by early 1991.
Other factors like:
- Sanctions against oil-producing countries
- Bad weather that delays the shipment of oil
- Increased drilling activities
- Seasonal demand
- Damage caused to critical oil pipelines
- The value of the U.S. dollar and other currencies
- Technological innovations, like fracking
And other factors can all influence the supply and demand for oil, and hence, its price.
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