What is crude oil? Beginner's Guide to Oil Trading

What is crude oil and why is it used?

Crude oil, or petroleum, is a natural fossil fuel and is currently the world's primary source of energy. It is made from ancient organic matter and can be distill.

The commodity is typically extracted from underground reservoirs through drilling, and the countries producing the largest volume of crude oil as of 2019 are the United States, Russia, and Saudi Arabia.

To understand how crude oil is related to other energy resources and assets, as well as how to trade them, please visit our Main Commodities page.

Explanation of BRENT and WTI crude oil

The composition of crude oil depends on the source, but two types are used to compare global prices. These are West Texas Intermediate (WTI) crude oil from the United States and Brent crude oil from the United Kingdom.

The differences between the two depend on factors such as composition, place of production, and prices, but for more information, as well as how to trade each asset, check out our WTI vs Brent comparison.

Strong players in the crude oil market?

The Organization of the Petroleum Exporting Countries (OPEC) was established in 1960. This organization sets production quotas for its members in order to reduce competition and maintain prices at a profitable level. OPEC is dominated by Kuwait, Qatar, Saudi Arabia (which controls the Strait of Hormuz) and the United Arab Emirates.

Although OPEC controls a large percentage of oil supplies, the United States is the world's largest oil producer as of 2019.

Institutions that supply oil to the global market consist of international oil companies, or IOCs, such as ExxonMobil, BP, and Royal Dutch Shell. They are owned by investors and seek to increase shareholder value through private interests. However, national oil companies, or NOCs, such as Saudi Aramco and Gazprom, are fully or majority owned by the national government.

What influences the price of crude oil?

Crude oil prices are mainly influenced by supply and demand, which in turn are affected by factors such as disruptions, OPEC production cuts, seasonality, and changing consumption patterns. To learn more about this and why they are important fundamental factors to understand when trading the asset, check out our Crude Oil Trading Guide.

The US dollar and the price of oil

The US dollar and oil have historically had an inverse relationship. When the US dollar is weak, the price of oil has traditionally been higher in dollar terms. Since the US has long been a net importer of oil, a rise in the price of oil has meant a rise in the US trade deficit, as more dollars need to be sent abroad. However, some believe that this relationship has less reliable patterns in modern times.

There is a more predictable relationship between the Canadian dollar and oil prices. For example, as of 2019, Canada exports about three million barrels of oil and petroleum products per day to the United States, which means a huge demand for Canadian dollars. If demand in the US grows, more oil is needed, which often means higher oil prices and, accordingly, may mean a drop in the USD/CAD exchange rate. Conversely, if demand in the US falls, oil prices may also fall, which means that demand for CAD will in turn fall.

Reasons to trade crude oil

Oil is a dynamic, volatile, and liquid market, and it is the most traded commodity in the world. Here's more about the benefits of working with this resource.

The volatile nature of trading this asset makes it a favorite of swing and day traders who react to the latest news about oil prices. Although trading can be risky, some see the oil market as an opportunity in its purest form.

Crude oil is a liquid market, trading in huge volumes. This means that trades can be opened and closed at the right prices and with lower trading costs.

Oil can be traded as part of a hedging strategy to mitigate the impact of the asset's volatility.

Oil trading can be part of a diversified portfolio of commodities, stocks, and bonds.