How to Trade Oil in 2022

Nov 19, 2021 10:49 AM ET
How to Trade Oil in 2022

Crude oil, also known as black gold, is one of the most widely traded commodities on a global scale. It is typically found as a raw material in North America and the Middle East. It is utilized in the production of a wide range of products, including cosmetics, automobiles, fabrics, plastics, pharmaceuticals, and petroleum. Oil prices have fluctuated dramatically in recent years, making oil trading riskier. This is due to the fact that the supply and demand for oil are continually changing, as does the price. However, because oil is a liquid commodity, it may be traded in vast quantities.

Price action outlook on oil in 2022

The United States government forecasted that the global oil market would become oversupplied and prices would decrease by early next year, dampening anticipation that the White House would draw on the nation's emergency reserves. Increased supply from OPEC nations as well as US drillers next year will eventually push prices lower. 

According to the Energy Information Administration's Short-Term Energy Outlook, the US benchmark crude will fall below $80 per barrel by December and hit as low as $62 by the end of next year, while its worldwide equivalent Brent will average $72 per barrel in 2022. According to the estimates, gas prices in the United States will fall below $3 per gallon by February.

In 2022, the global oil supply is expected to average 101.42 million barrels per day, while global consumption is expected to be 100.88 million barrels per day. Meanwhile, as drillers make a comeback, crude production in the United States is predicted to grow to an average of 11.9 million barrels per day in 2022. Almost 15% increase in West Texas Intermediate crude prices since July has enticed some shale producers, most notably private drillers, to increase output. While the projection indicates an increase in supply, it is still far from the record yearly volume hit in 2019, as the recovery has been uneven across major shale basins.

How to trade oil in 2022

Betting on spreads

Spread betting in the crude oil market is taking a long or short position on the price of oil in the future. For example, if you believe the price of oil would grow after significant research, you might spread bet on it. In 2022, investors predict that the price of crude oil will go up; thus, one can spread bet in anticipation of the surge. More research is advised before trading since the market can be volatile.  

Leverage is used in spread betting. This means that to enter the oil market, you simply need a fraction of the total trading value as a deposit. You do not own the oil, but you can speculate on how much it will cost. Spread betting is hazardous because, while you can gain more than your initial investment, you can also lose more.

Oil futures

Oil futures are contracts to buy or sell a fixed amount of oil at a predetermined price on a specific future date. Futures prices forecast the value of oil at the time the contract expires. Because futures prices fluctuate in relation to the price of oil, trading oil futures entails considerable risk.

Futures contracts are completed by physically delivering barrels of oil or cash settlements, so keep delivery and expiry dates in mind. You can roll over your position for another month or close it before your future contract expires to avoid losses. According to investors, it is predicted that the price of oil will fall in 2022, so one can set a price to buy futures in 2022. The market is volatile, so this can change. 

Oil exchange-traded funds (ETFs) 

ETFs are funds that own shares in oil companies. Such funds are traded on stock exchanges like usual stocks. Some oil ETFs are leveraged in two ways, standard leverage and inversely leveraged. 

Standard leverage: This produces a multiple of a performance index. For example, if you have a 3* standard leverage and the market rises 1.5 percent, your starting position will increase by 4.5 percent.

Inversely leveraged: This produces a multiple of the inverse of a performance index. For example, if you have a 3* inverse leverage and the market falls 1.5 percent, you will get 4.5 percent of your initial investment.

Contracts for the difference in crude oil (CFDs)

CFDs are contracts between a trader and a broker to swap the difference in price between the opening and closing of a position. Leverage is used in CFDs. A crude oil CFD order can be as small as 25 barrels, as opposed to the 1000 barrels required for a futures contract. However, this may differ depending on the brokerage firm.

Trading oil spot prices

The spot price of oil is the price of oil at the time of purchase. Spot oil trading is typically a short-term transaction that allows you to take positions for a shorter period of time. This allows you to do a deeper technical analysis to forecast price fluctuations.

Trading oil options

An oil option functions similarly to a futures contract, with the exception that there is no commitment to buy or sell the oil when the option expires. Calls and puts are the two forms of options. If you believe the price of oil will rise, you buy a call, and if you believe it will fall, you buy a put. If you want to take opposing positions, you can create cash by selling calls and puts. However, if the market goes against you, you could suffer significant losses. 

Conclusion

The oil market is a volatile market. Before trading, one should do an in-depth analysis. Investors predict that the price of oil will reduce in 2022, mainly because the market is oversupplied. There are a number of ways one can trade oil which include; betting on spreads, buying or selling oil futures, using oil ETFs, using oil CFDs, trading oil spot prices, and trading oil options. 


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