Advantages of oil futures trading: is it really worth it?

Oil is one of the most important resources in the world as of now. The human economy as well as everyday livelihood is extremely dependant on it. Although there are a number of companies trying to create alternative sources of energy like Tesla coming up with fully electric vehicles and other companies working on nuclear, solar, ethanol, and wind-powered energy the oil still stays on top of the food chain as of now.

Oil and Diversification

When it comes to a grand machine of the world economy, oil is something that makes the wheels spin. Even in the face of global pollution and climate change arguments that are being presented everything needs oil in one way or another. Huge tanker ships sailing across the globe, cars that we drive to work, cabs, busses, airplanes are all utilizing this resource. So in other words, it is in high demand. Countries that have this natural resource are profiting off of mining it. Middle eastern nations are the ones that come to mind when it comes to this particular economic endeavor. Saudi Arabia is one of the biggest oil exporters in the world where they provide as much as 13.3% of the worldwide oil supply. Iraq comes close with 8.3% or $68.1 billion, followed by the United Arab Emirates with 6.6% or $66 billion. All of them are reporting shrinking in the industry due to the novel coronavirus pandemic that has forced the world into a lockdown.  According to recent reports Dubai which is one of the most oil-rich emirates of the whole UAE federation reports as much as a 30% shrink since 2019. Add the current crisis to the imminent depletion of oil (as it takes much longer for Earth to make the supply than the rate at which we spend it) we get a very volatile market. A couple of months ago we had market mayhem where the US oil prices fell to historic negative numbers as the demand was practically non-existent. This is mostly why most of the countries that are heavily dependant on oil exports are trying to diversify their economy.

Crude oil traders are not exempt from this. While the price volatility and shift in the rate of demand create a comfortable spot for a number of investors there are still people trying to switch towards other markets because of the instability. The foreign exchange market (Forex, FX) has become much more popular in the region due to this very same reason. The United Arab Emirates with its diversification strategy has made some efforts to switch away from the oil as much as possible. Due to this, a good number of people are finding incentives to also diversify their trading assets. While crude oil prices keep jumping around the fiat currencies are much less volatile. This is why we see a good surge in numbers of UAE Forex brokers who have caught onto this trend and made their marketing operations that much more appealing as well as boosted their presence online. If the trader is persistent enough they will even be able to find brokers that offer to trade on forex as well as commodities (CFD brokers mostly) with good deposit bonuses, leverages, services, and other quality material that comes in helpful.

Why Trade in Oil Futures?

First of all, lets quickly mention what oil futures are. These are derivative securities that allow traders to buy oil at some market defined price much alike stocks. If the investor decides to exercise their future by the settlement date then the purchase, which happens in the units of 1000 barrels, will gain ownership for the price agreed in the contract. Most of the people just try to analyze the market and see if the prices will be going up so that they can hold onto the assets and sell later to make a revenue.

Crude oil futures investments have huge profit potential. This is one of the most active derivatives on the market. Therefore, there are a good amount of advantages to trading oil.

Potential Revenue

As we have already mentioned oil futures have a possibility to present very lucrative investment opportunities. This is a place where witty traders make a couple of thousands per trade while at the same time requiring much less investment than the stock market in comparison. The price is extremely volatile and can depend on anything from political decisions to the season of a year. The prices keep jumping around by substantial amounts. Once the value dips under those who hold the futures to purchase at lower prices profit by a lot.

Asset in Demand

We already discussed this multiple times but it needs to be reiterated that at this moment oil is an irreplaceable asset and the supply is very much limited. This means that the investors can take advantage of the situation to plan in advance that the prices will, most probably, increase if there are no technological breakthroughs that remove the dependency of every industry upon this asset. Even if such happens companies can’t just ditch their huge supply of working vehicles like ships, cars, and construction equipment and instantly switch them out with the replacement.

Liquidity

Liquidity is also one of the main reasons why this market draws in so many people. Oil futures are one of the most liquid assets due to the volume that is traded each day. As a matter of fact, the most actively traded commodity is crude oil.

Leverage

Oil futures offer leverage much like the foreign exchange market. This means that it is possible to buy with borrowed money from the broker. The margin requirements are also set quite low meaning that with considerably low capital investment a trader has an ability to trade 10 or 20 times more. However, this is a double-edged sword that cuts deeply both ways. While presenting an opportunity to make huge revenue it is also extremely important to understand that the trades that go sideways will harm the capital investment in a major way.

Simple to Trade

Trading oil is much easier than a number of other assets. Obviously having a knowledgeable broker to help in this endeavor is a must but trading strategies are much less complicated than on forex or other markets.

EndNote

Taking the first steps in oil futures is a bit of a complicated process though. Opening an online futures account is not always guaranteed. However, once this is done things are becoming that much easier. Futures lose their value the more they approach the expiration date. This means that a trader needs to be witty enough to analyze the market daily, pay attention to the weather, political, and other aspects that affect oil prices. The whole point of this type of trade is to predict how the prices are going to go in the future. The trader basically bets on the market movement so it’s not something one can just invest and abandon until the expiration date.

Oil futures can also be short sold. This means that the trader can basically bet against the future price of the asset. An important thing to keep in mind is that one futures contract means ownership of 1,000 barrels of oil. This is why every time the price changes with even $1 the trader is either gaining or losing $1,000. The sword cuts both ways and while lucrative at certain points it will hurt sometimes as well.

If the trader is clever enough to forecast the pricing correctly the revenue is going to be huge but if things go sideways then the losses can be quite hurtful. This is why you should never invest funds that you require to last from month to month.