10 Crude Oil Spread Trading Facts
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The Crude Oil markets can move a lot on rumour, news of supply problems in the Gulf of Mexico, news of OPEC increasing production levels, changes in USD exchange rates etc but what about the Facts?
- One of the biggest factors affecting the price of crude oil is the exchange rate. Because Oil is traded in US Dollars then, all things being equal, the price of Crude Oil often follows the US Dollar exchange rates.
If the US Dollar depreciates in value against the Euro and / or Pound then the price of Crude will go up. If the dollar grows stronger, the price drops. This is not guaranteed but it is always worth taking this important correlation into account.
- There are generally two types of crude oil that are traded:
- Brent Crude Oil which is based on the price settled at the Intercontinental Exchange (ICE), a London based exchange on which futures and options on energy products are traded
- Nymex Crude Oil (also known as US Crude, WTI or West Texas Intermediate) which is based on the price settled at the New York Mercantile Exchange (Nymex)
You can spread bet on both of these with companies like Financial Spreads
- Crude Oil, whether Brent Crude or Nymex, is priced in US$ per barrel
- When spread betting on Crude Oil you trade in Pounds per ¢, € per ¢ or Dollars per ¢
If you are betting £2 per ¢ (£2 per $0.01) and the price of a barrel moves by $1.50 (150¢) then your profit / loss would alter by £2 per ¢ x 150¢ = £300.
For a fully worked example see > Crude Oil Spread Bet
- The price of Nymex (US Crude) is normally always higher than Brent Crude Oil
- A number of spread betting companies let you trade two different types of Crude Oil market
- A Daily Market, aimed at Day Traders with narrow spreads
- A Futures Market where the market is settled in 1-3 months time. With this option the spread is wider.
However these futures markets can be better value than the daily market if you want to hold on to your bet for the short-medium term.
- Interest Rate changes can have knock on affects. Trends do not always follow and we know that past performance does not always predict the future. However in 2008 when the US Government was lowering Interest Rates that caused weakness in the USD and therefore, again, with a lower dollar there were large increases in the price of crude
- You can spread bet on Crude Oil tax free* and commission free with companies like GFT, IG Index and World Spreads.
Supply and Demand
- When you are trading crude oil be aware of supply problems. Most readers will be used to OPEC making supply statements and naturally in a world of Supply and Demand those statements will affect the price.
- Other problems that affect the supply and therefore see the price rising / falling include Political Problems in the Middle of East (and particularly the threat of conflict), extraction problems / costs in Nigeria etc
"10 Crude Oil Spread Trading Facts" written by RThomas, last updated 25-Aug-2008
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