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Basics of Crude Oil Trading in the UAE

Due to UAE's unique position within the world's economic and political systems, trading its crude oil production provides a tremendous potential for profit in practically all market scenarios. In addition, volatility in the energy industry in the UAE has grown dramatically in recent years, implying strong trends that can deliver consistent profits for short-term swing trades and long-term timing techniques.

Market players in the UAE frequently fail to capitalise on crude oil variations, either because they haven't mastered the specific characteristics of these markets or because they are ignorant of the hidden hazards that might eat into profits. Furthermore, not all energy-focused financial instruments are equal, with a selection of these assets more likely to yield favourable returns.

Main points to keep in mind before trading Crude Oil

Crude oil is impacted by global output as well as global economic success as it swings via supply and demand views. Oversupply and decreasing demand drive traders to sell crude oil markets, whilst growing demand and dropping or flat output urge traders to bid up crude oil prices.

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Tight convergence between positive variables can result in tremendous uptrends, such as crude oil's ascent to $145.31 per barrel in July 2008.

When crude oil reacts to mixed conditions, price action tends to form tight trading ranges, with sideways movement lasting for years at a time.

The energy futures markets are dominated by professional traders and hedgers, with industry participants taking positions to offset physical exposure and hedge funds speculating on long- and short-term direction. Retail traders and investors have less clout in this market than they have in more emotive markets such as precious metals or high beta growth stocks.

When crude oil prices climb dramatically, retail becomes more influential, pulling capital from tiny players pulled into these markets by front-page headlines and table-pounding talking heads. Following waves of greed and terror may amplify underlying trend momentum, contributing to historic climaxes and crashes that print in extraordinarily large volume.

West Texas Intermediate Crude (WTI) and Brent Crude (Brent) are the two key markets for crude oil. WTI is derived from the Permian Basin and other local sources in the United States, whereas Brent is derived from over a dozen fields in the North Atlantic. The sulphur content and API gravity of these kinds varies, with lower values typically referred to as light sweet crude oil. Although WTI was more extensively traded in the global futures markets in 2022, Brent has proven a stronger indication of global price in recent years (after two years of Brent volume leadership).

For years, pricing between both grades remained within a close band, but that ended in 2010, when the two markets diverged substantially due to a quickly shifting supply versus demand situation. The surge in US oil production, driven by shale and fracking technologies, increased WTI output while reducing Brent drilling.

The Arab oil embargo in the 1970s exacerbated this separation by barring local oil businesses from selling their inventories in global markets. In 2015, the prohibition was lifted.

Many of CME Group's NYMEX futures contracts reflect the WTI benchmark, with the "CL" ticker garnering large daily trade.

The vast majority of futures traders may devote their whole attention to this instrument and its numerous derivatives. ETFs and ETNs provide equity access to crude oil, but their mathematical structure creates severe constraints owing to contango and backwardation.

WTI crude oil climbed after WWII, peaking in the mid $20s before falling into a narrow band until the 1970s embargo prompted a parabolic rally to $120. It peaked late in the decade and then began a tortuous descent, sinking into the teens as the century approached. Crude oil began a fresh and sustained upswing in 1999, reaching an all-time high of $157.73 per barrel in June 2008. The price subsequently fell into a large trading range between that level and the mid $20s, eventually stabilising at $55 at the end of 2017. It was selling at around $102 by the end of March 2022.

The NYMEX WTI Light Sweet Crude Oil futures contract (CL) trades more than ten million contracts each month, providing excellent liquidity. However, because to the 1,000 barrel contract unit and.01 per barrel minimum price volatility, it carries a rather significant risk.

There are dozens of additional energy-related products available on the NYMEX, the great majority of which attract professional speculators but few individual traders or investors.

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The most popular way to play crude oil through equities is through the U.S. Oil Fund, which has an average daily volume of more than 20 million shares. This product mimics WTI futures but is susceptible to contango because to price differences between front month and longer-dated contracts, which reduces the magnitude of price extensions.

Oil firms and sector funds provide a wide range of industry exposure, with production, exploration, and oil service activities giving distinct trends and possibilities. While the majority of corporations follow overall crude oil patterns, they can deviate dramatically for extended periods of time. These counter-swings frequently occur when equities markets are rising quickly, with rallies or selloffs creating cross-market correlation and encouraging lockstep behaviour across varied sectors.

Some of the biggest  U.S. oil company funds are:

With many nations' economy heavily reliant on their energy resources, reserve currencies provide an ideal option to get long-term crude oil exposure. For years, the US dollar has tracked crude oil through crosses with the Colombian and Mexican pesos, denoted by the tickers USD/COP and USD/MXN, respectively, providing speculators with highly liquid and readily scalable access to uptrends and downtrends. Bearish crude oil positions necessitate the purchase of these crosses, whilst bullish crude oil positions necessitate the sale of these crosses.

To produce regular gains in the crude oil and energy markets, special skill sets are required. Market participants interested in trading crude oil futures and derivatives must understand what drives the commodity, the nature of the dominant crowd, long-term price history, and physical variances between various grades.

Sourced from: Investopedia

Learn more about online trading brokers for UAE citizens and residents.

Best Online Brokers for trading Forex, Bitcoin, CFDs and Stocks in the UAE

Here is a list of top online brokers to open an account for trading Forex, Bitcoin, CFDs and Stocks in the UAE. These brokers have above-average reviews on sites like Reddit, Quora and Trustpilot; and are totally legit, safe and trustworthy for UAE citizens and residents.

The brokers listed on this webpage accept clients from within the United Arab Emirates. Most of these companies provide an online trading platform for fiat currencies (such as Pound Sterling, the Euro, the US dollar, Japanese Yen etc.), buying and selling of cryptocurrencies (for example Bitcoin, Ethereum, Tether, XRP etc.), stocks (this includes listings on Abu Dhabi Securities Exchange, Borse Dubai, Dubai Mercantile Exchange, Dubai Financial Market and NASDAQ Dubai), CFDs (Apple, Microsoft, Amazon, Google, Tesla etc.), UAE government and corporate bonds, and short-term to long-term fixed income securities.

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