Referred to as “black gold” and “the mother of all commodities”, crude oil is used for manufacturing everything from plastics to petroleum, cosmetics to cars, and fabrics to pharmaceuticals.
With so much demand, it's little surprise that oil has been identified as a leading cause of modern wars. Mostly, however, oil is traded peacefully.
For those looking to gain exposure to the oil market, understanding how it works and what influences oil prices is an important starting point. This guide explores the main types of crude oil, key global producers, the factors that drive oil prices and the different ways to trade oil with CMC Markets Australia.
Key takeaways
Crude oil is one of the world’s most actively traded commodities and is known for its high liquidity and price volatility.
Brent Crude and West Texas Intermediate (WTI) are the two primary types of crude oil used as global benchmarks for oil prices.
Oil prices can be influenced by factors including geopolitical events, economic conditions, production decisions, natural disasters, inventories and changes in global demand.
Oil prices can experience significant swings, making research, a considered trading strategy and appropriate risk-management tools important when trading oil.
What is oil trading?
Oil trading is the process of buying and selling crude oil, one of the most actively traded commodities in the world. A raw material that is commonly extracted from Middle Eastern countries, it is referred to as “black gold” and “the mother of all commodities”. It’s popular among traders due to its high volatility during times of geopolitical uncertainty, as well as a changing supply and demand largely driven by the OPEC cartel.
Why is oil trading popular among CFD traders?
Oil is a popular commodity to trade due to its high liquidity and volatility. It can be bought and sold at its market value (oil spot price and futures) or through speculation in the form of CFDs, as it presents a number of trading opportunities.
An extremely valuable resource, it can be refined into everyday products, such as gasoline, diesel and other petrochemicals, which are consistently in high demand. It is also the world’s primary energy source. Crude oil is used for manufacturing everything from plastics to petroleum, cosmetics to cars, and fabrics to pharmaceuticals. In a modern world, there is an increasing human population and consumption of agricultural and recreational goods, which results in a greater need for energy.
Speculating on the energy markets can be a risky move. Where supply and demand are constantly changing, so is the price of oil. However, it’s a liquid commodity, meaning that it can be traded in large volumes and boasts a relatively tight spread of around 3.0 points on average.
Main types of crude oil
The type of crude oil depends on the geographic location of the oil field and the characteristics of the oil itself. While there hundreds of types of crude oil traded on the global market, two primary types of crude oil serve as global benchmarks for oil prices: West Texas Intermediate and Brent Crude.
West Texas Intermediate (WTI) Crude Oil
As the name suggests, WTI is sourced from US oil fields primarily in Texas, Louisiana and North Dakota. It is referred to as 'light sweet crude oil' due to its low density and low sulphur content. These characteristics make it less expensive to produce and easier to refine than 'heavy' or 'sour' oils. WTI is the main benchmark for oil consumed in the US.
Brent Crude Oil
Brent oil comes from 15 different oil fields in the North Sea. It is also characterised as a “light and sweet” oil, although it is not as “sweet” or “light” as WTI. Up to two-thirds of global oil contract trades are on Brent.
Main producers of oil
By country, the United States is both the world's biggest producer and consumer of oil. Each day it produces 17.87 million barrels of oil (18% of global production) and consumes 19.69 million barrels (20% of global consumption).
In terms of production, Saudi Arabia comes in second – producing 12.42 million barrels/day (12%) – followed by Russia with 11.40 million barrels (11%). Canada, China and Iraq each produce around 5% of global oil.
On the consumption side of the equation, China follows the US as the biggest user of oil – it consumes 12.79 million barrels/day (14%) while India's usage of 4.44 million barrels/day puts it third.
Saudi Aramco is the reigning global giant in terms of production. In 2018 it was the world's most profitable company, generating US$111.1 billion in net income and producing 13.6 million barrels/day.
Other top producers in 2018 were Sinopec (US$9.2 billion net income), China National Petroleum Corporation (US$7.4 billion), Royal Dutch Shell (US$23.9 billion) and ExxonMobil (US$20.8 billion