Trade with oil using CFD
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Why do a lot of Nigerian investors want to trade with oil? For the active investor, oil presents attractive volatility that provides the back-bone for profitable trading. Oil prices are often regarded as the most important indicators of the global economic health is, to know surprise, very important to the Nigerian economy. There is further more a strong correlation between the supply and demand of oil and the growth of the general economy.
Oil prices are effected by perceived shortages of demand and supply and weather conditions. These can have a direct impact on oil prices, for example from new of political unrest or weather storm effecting oil shipping routes. Even with these uncertainties, oil is regarded as a stabile commodity even when the stock markets aren’t performing well since the demand for oil will continue to be high regardless of underperforming listed companies and their respective stocks.
On a truly globalised market, oil is very price sensitive asset with prices constantly fluctuating up and down. This makes it an ideal trading asset active traders that are looking for quick movements in the assets price. The simplest way to trade with oil is by using a CFD (or contact for difference as it stands for) and is just like gold one of the most traded commodities which means that you should have the ability to enter and exit a trade regardless of its size and timings.
CFD’s for oil are available in two different instruments, either Light Crude that is traded on the New York Stock Exchange or Brent Crude which are priced using a futures contract on many different commodities exchanges around the world. You can also trade heating oil although this is rarer then the other two in size of trade. The deal sizes for oil using CFD’s are much smaller compared to futures contacts, for example a CFD contract usually only carries 25 barrels of oil were a future would require at least a 1000 barrels to be bought at one time. Futures contracts also contains a roll-over mechanism since they are time based whereas a CFD does not have any of these constraints.
Let’s illustrate how a CFD trade with oil would work. Say that you are interested in trading an oil CFD and the buy price was 78,25 USD and the sell price was 75,80 USD. The higher price is for a long contract (i.e. if you think that the price will go up) and the lower is for a short contract (i.e. if you think that the price will fall). The CFD trade is usually commission free but the broker will make its profit from the spread which in this case is 0.25 USD. To buy five CFD’s with a marginal ratio of 3% you would require 78,50 USD x 5 x 100 x 3% which would be 1177,50 USD on your trading account and with this would you have an oil trade worth 39,250 USD. During the morning the price rises from 80,75 USD to 81,00 USD which is an increase with 0.25 USD. When you sell your five oil CFD contacts the worth of them are 80,75 x 5 100 or 40,375 USD. Your net profit would be 1125 and your return on invested capital would be 95%.
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