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Crude oil, frequently called 'black gold', represents one of the most exchanged (and fungible) commodities globally. It powers our vehicles and presents a dynamic and challenging environment for investors.
Contracts for Differences (or ‘CFDs’) are leveraged financial derivatives products that allow market participants to trade and invest in the global markets, including crude oil. With crude oil CFDs, you don’t purchase barrels of oil; instead, you buy and sell units of contracts based on the underlying asset. All CFDs, therefore, are cash-settled.
CFD crude oil products are particularly interesting for individual investors because they omit the logistical complexities of physically handling crude oil. You’re spared from dealing with transportation, storage, or consumption - you’re purely trading based on price changes seen in the oil space, often with the added benefit of leverage.
In the global crude oil landscape, two significant classifications of crude oil dominate the market: West Texas Intermediate (WTI) and Brent Crude.
These are not just different oil types; they represent separate markets with unique influences and behaviours.
West Texas Intermediate (WTI)
WTI is a type of crude oil used as a benchmark in oil pricing and the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contracts.
Commonly referred to as 'light sweet oil', WTI crude oil is known for its relatively low density and sulphur content, ideal for refining into gasoline. Its pricing is influenced heavily by US supply and demand conditions, making it particularly sensitive to US economic indicators and geopolitical events.
Originating from oil fields in the North Sea between the Shetland Islands and Norway, Brent crude oil—another global oil benchmark—is a blend of various oil types from 15 fields across the Brent and Ninian systems. Brent's sulphur content is higher than WTI, classifying it as ‘sweet’, but it’s still considered a light crude oil. However, its density and sulphur content make it slightly less ideal for gasoline refining, influencing its market value.
Brent is a waterborne crude, making it a readily exportable product. Its price is more influenced by global factors, such as geopolitical shifts in Europe and the Middle East, changes in the Organisation of the Petroleum Exporting Countries (OPEC) oil production, and global economic growth rates.
WTI VS Brent
The different production, refining, transportation, and storage costs between WTI and Brent contribute to the frequent price disparity. Brent typically commands a higher price due to its broader market relevance and its higher transportation costs. It’s considered the global benchmark, with approximately two-thirds of all crude contracts worldwide using Brent as a price marker.
This price differential, known as the Brent-WTI spread, can indicate various market conditions and influences, such as supply disruptions due to geopolitical events, OPEC’s policies, or inventory shifts in US crude storage tanks. For traders, understanding the factors driving this spread is a crucial element in predicting price movements for both oil types.
Several components choreograph the dance of crude oil prices:
Embarking on the journey of investing in crude oil CFDs creates the need for acute market awareness, diligent risk management, and an appetite for learning. While the venture can generate substantial gains, the risks are equally steep. As such, an investor’s resolve, knowledge, and strategic skills are their truest allies in navigating the volatile waves of the crude oil markets.
Selecting the right CFD broker can seem daunting, but with the proper guidance and a reliable trading platform, the task becomes significantly more straightforward.
FP Markets, a leading Forex and CFDs broker, offers an extensive range of CFD assets, along with intuitive trading platforms, such as MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader, as well as robust educational resources delivered by industry experts.
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