April 17 - Leonardo Siligato
Inflation doesn't only make your bills fatter. It also cuts companies' bottom lines. Here's how.
So you want to get into oil trading?
Have crashing oil prices ever brought out the opportunist in you? Made you think, ‘If only I could buy some oil and profit when the price inevitably bounces back.’ Sort of like how you kept all your old comic books, hoping they’d be worth something one day!
Well, buying actual oil is one way to do it. But with oil trading, there’s no need to go stacking barrels of crude in the cellar. Before we go into that though, let’s start with the basics.
Theoretically, yes. But in practice…no.
Oil is a commodity, a raw material whose value and characteristics don’t differ from barrel to barrel, regardless of producer.
Same same…but different
But in fact, there are different types of oil. Some are light, others are heavy (high-density). Some are sweet – it simply means it contains less sulfur, so don’t try to get a taste of it! – while some are harsh (more sulfur).
It’s like red apples – you have the Fuji, the Pink Lady and so on. If you’re not into apples, they may all seem the same but they actually have different taste profiles and textures. This results in differences in price.
Similarly, light and sweet oils cost more than other types of oil. Why? Because it’s easier to refine them.
So how are these oils priced then?
Shutterstock sheikh knows
A benchmark is a crude oil that is used as a pricing reference. If the price is around $40 a barrel and you want to sell a similar oil for $100 – well, you’re not going to easily find buyers.
There are several benchmarks for oil. But the ones you hear quoted most in the news are Brent and WTI, which stands for West Texas Intermediate. They are both light, sweet and thus, in very high demand. Brent is the North Sea oil, while WTI is – as you may have guessed from its name – Texan. As WTI is better (lighter and sweeter) than its European counterpart, it is supposed to trade at a premium. But since 2010, the situation has flipped. It now costs a few bucks less than Brent since there’s a lot more of it in supply.
Although the prices of these two benchmarks differ by a few dollars, they generally move like synchronised dancers.
Goddamn, they’re perfectly in sync!
When one rises, the other tends to go up as well. So when you hear about soaring or falling “oil prices”, they’re referring to all the major benchmarks. You know what they say, a rising tide lifts all boats. And they can also get capsized at the same time…
In short, the “oil price” is a simplification: there are several types of oil at varying prices. But for the same type of crude oil (let’s say WTI), there are two prices: spot price and futures price.
There are two types of contracts when it comes to oil trading: spot contracts and futures contracts.
If I were to sell you oil with a spot price, that means I’m charging you the current market price. Then I would have to immediately deliver the goods to you. Whereas a futures contract would see us locking in a price for a specified date in the future. It came about as a way for both buyer and seller to safeguard themselves from the risk of fluctuating prices. Think of it like pre-sale concert tickets. If you miss out on them, you might end up paying double on some ticket reselling marketplace next month…
Futures allow people who don’t want to take physical delivery of the goods to profit from changes in prices. So it lets everyone get involved with oil trading. Even if you’re the sort who’d rather store beer kegs than oil barrels in your cellar.
Now here’s where it gets interesting: the futures price is no guarantee of the actual price of oil once that delivery date comes. Some consider futures prices as a forecast for future spot prices. But there can be vast differences since there are many factors that may impact the price in between. Which brings us to the next question…
Oil traders every time OPEC fails to reach a deal
Um, because it’s more exciting than trading soybeans? For a trader, oil futures are super appealing for two reasons. Firstly, they’re very liquid. It means they’re traded at very high volume so you never have to worry about being unable to sell them. Also, it can be highly volatile because of all the variables affecting prices. This presents juicy opportunities for profits (and also losses, so watch out!)
You can invest in oil futures but a typical futures contract contains 1,000 barrels. At the current WTI price, that would set you back over $45,000.
An alternative is exchange-traded funds or ETFs, oil-based securities traded on an exchange much like shares. Buying one ETF will cost you about the same as a barrel of oil.
But the simplest and most affordable way to get into oil trading? (Without having to sell your car or prized comic books.) It’s with CFDs, or contracts for difference, on BUX. Trade US oil with BUX now!