Strategies for trading oil through Contracts for Difference

Oil is one of the most traded assets worldwide, especially attractive to investors seeking to capitalize on market volatility. The main reason lies in the fact that crude oil prices fluctuate significantly in response to economic, geopolitical, and supply-demand changes, creating trading opportunities for experienced operators.

Why do oil CFDs generate so much interest?

Contracts for difference on crude oil have become popular instruments for speculating on price movements without the need to physically purchase barrels. These derivatives allow traders to agree on exchanging the difference in value between opening and closing positions. The CFD structure leverages the current volatility in the oil sector, enabling both profits and losses depending on the accuracy of market predictions.

Key fundamentals: leverage and risk management

One of the most relevant aspects when trading oil is leverage. This mechanism allows maintaining only a fraction of the total position value, providing greater exposure to the crude market. For example, with a 3% margin, a trader can control a position significantly larger than the actual deposited capital. However, this feature amplifies both gains and losses, making it essential to implement solid risk management strategies, such as stop-loss orders that automatically close positions when reaching the defined risk threshold.

Practical case: trading WTI CFDs

Suppose a trader is bullish on WTI oil, quoted at USD 85.41 (short sale) and USD 85.46 (long buy). To acquire 10 long contracts with a 3% margin, they would need USD 2,562.30 in their account (USD 85.46 × 10 contracts × 100 barrels per contract × 0.03). This means controlling USD 85,460 in crude exposure with only USD 2,562.30 of capital.

If later the price rises to USD 87.50, the trader could close the position with a USD 2,090 profit. Conversely, if the price drops to USD 83.32, the loss would be of the same amount. This example illustrates how small price movements generate results proportional to the leveraged exposure.

Steps to start investing in crude oil

Select the type of oil: It is essential to choose between WTI (West Texas Intermediate) and Brent, both important global benchmarks. WTI comes from fields in Louisiana and Texas, characterized as lighter and sweeter crude. Brent is obtained from the North Sea, with lower transportation costs, enjoying greater international recognition.

Analyze market information: Keep track of specialized analysts providing context on global news and their potential impact on prices. Geopolitical movements, OPEC decisions, and global economic factors constantly influence quotes.

Develop a trading plan: Define strategies tailored to the investor’s profile, short or long-term horizon (, and risk tolerance. Some traders prefer baskets of commodities including fuels and natural gas, diversifying risk across multiple energy assets.

Alternative: stocks of oil companies

Another way to gain exposure to the energy sector is through CFDs on shares of major oil corporations. The top three by market capitalization are:

ExxonMobil: US-based corporation whose shares have gained 50.44% during the current year, reaching all-time highs of USD 105.57 per share in June.

Chevron: Shares have appreciated 32.36% year-to-date, with all-time highs of USD 182.40 in early June. Analysts project earnings growth amid high crude prices, although some experts note that their project portfolio is less attractive compared to competitors.

ConocoPhillips: Multinational corporation engaged in exploration and production of hydrocarbons, recently surpassing PetroChina as the fifth-largest oil and gas company by market capitalization. The stock has risen 42.77% in the current period.

These stocks offer alternatives for investors with limited budgets, allowing diversified exposure to the sector through established companies.

Technical analysis: reading charts and trends

To successfully speculate in the oil market, mastering technical analysis is essential. This approach requires the ability to interpret charts, anticipate price movements, and understand the elements that cause fluctuations in quotes.

Analysis is performed using online price charts of WTI or Brent per barrel. Investors employ technical indicators of mathematical or statistical nature that provide information on liquidity, volatility, trend direction, and strength. These indicators must be correctly interpreted to extract precise signals about probable upward or downward movements.

Using Japanese candlesticks, the top represents the highest reached and the bottom the lowest of the period. Continuous curve charts are even more intuitive to read, showing price movements directly.

Futures contracts: mechanism and features

Oil futures are contractual agreements that allow buying and selling oil at a predetermined price on a future date. These are typically traded on local exchanges and are standardized instruments.

Main features:

• Each standard contract represents 1,000 barrels, where USD 1 movement equals USD 1,000 in contract value
• Margin required is approximately 10%, relatively high compared to barrel value
• Settlement through physical delivery of crude
• High complexity for professional traders due to costs and procedures

It is critical to monitor delivery and expiration dates, transferring positions to other months or closing them entirely before the commercial expiration.

Fundamental differences: WTI versus Brent

Oil prices fluctuate based on supply, demand, and geographic origin. Although both are widely traded benchmarks, they have relevant differences:

WTI: Extracted from fields in Louisiana and Texas. Classified as lighter and sweeter crude with low sulfur content. It is obtained inland, increasing transportation costs.

Brent: Comes from the North Sea with greater international prevalence. Its marine location significantly reduces logistics costs compared to WTI. It enjoys broader acceptance in global markets.

These differences directly impact CFD prices of both references, especially during periods of supply-demand volatility and transportation costs.

Advantages of trading oil via CFD

Accessibility: Reduced minimum deposit requirements allow starting operations with limited capital.

Flexible leverage: Brokers offer adjustable leverage. Beginners are advised to use low levels to minimize risks during the learning curve.

Potential profitability: Despite significant volatility, opportunities exist to achieve returns above market averages.

Diversification: Exposure to energy provides returns that are less correlated with other sectors, improving risk-return profiles of portfolios.

Inflation hedge: Raw material prices like oil tend to rise with inflation, serving as protection against erosion of purchasing power.

Risks and disadvantages to consider

Vulnerability to external factors: Geopolitical events, price wars, government regulation, technological )transition to electric vehicles(, and economic cycles cause abrupt and dramatic fluctuations.

High volatility: Funds specialized in single-asset prices or sectors exhibit higher volatility than diversified portfolios. Futures and options will amplify this risk further.

Operational complexity: Requires constant market monitoring, understanding trading mechanics, and disciplined position management.

Timing considerations and opportunities

Recent projections suggest that the energy sector will contribute approximately 10% of the S&P 500’s gains, significantly exceeding its historical weight of 4%. In the first half of the year, while overall index gains grew 6.7%, the energy sector was responsible for avoiding declines, with an impact of +3.7%.

In the long term, oil and gas will continue to be primary energy sources, generating sustained opportunities for sector investors. However, individual viability depends on specific analysis, operational experience, and personal risk tolerance.

The decision to invest in oil should be based on thorough research, understanding of available instruments, and alignment with personal financial goals.