Should you invest in crude oil when prices are highly volatile? A detailed guide on investing in crude oil

The crude oil market is experiencing unprecedented volatility. WTI (USOIL) prices once plummeted to a record low of $20/barrel, then recovered to around $30/barrel. However, the biggest surprise was when the May oil contract hit an unprecedented negative $36.9/barrel — a never-before-seen event in commodity trading history. This led to shock sessions: USOIL dropped 53% and Brent (UKOIL) lost 25% of its value in just one day. With this volatility, many investors are on edge and asking: Is this the golden time to start investing in crude oil?

Crude oil market crisis: What are the causes?

To understand why crude oil prices are free-falling, we need to look at four main factors heavily impacting this energy market.

Record-breaking demand decline

A report from the U.S. Energy Information Administration (EIA) paints a bleak picture: oil demand in March 2020 decreased by 11.4 million barrels/day compared to the previous year. Even more alarming forecasts predict a 6.5% drop in oil consumption in 2020 — the deepest decline since 1980 in the energy sector. When market demand plunges while supply remains abundant, downward price pressure becomes unstoppable.

U.S. shale oil production continues to rise

Since 2015, the U.S. has entered the oil extraction race with unprecedented strength. In 2018, it surpassed Saudi Arabia to become the world’s largest oil producer. But the situation has reversed: demand is decreasing faster than consumption capacity, storage pipelines are nearly full, causing USOIL prices to collapse due to lack of excess storage.

OPEC does not want to lose its advantage

OPEC countries, especially Saudi Arabia and Russia, are in a tough spot. Cutting production could reduce revenue, but not cutting means losing market share to the U.S. competitors. Therefore, OPEC has yet to reach a binding cut agreement, leaving the market in continued uncertainty.

U.S. dollar appreciation

All crude oil contracts are priced in USD. When the dollar appreciates by 25%, it effectively makes oil prices decrease by 25% when converted. Global economic uncertainty keeps the dollar strong, adding further pressure on crude oil prices.

Opportunity or challenge? How to approach investing in crude oil correctly

An important point to clarify: although financial markets are buzzing about negative prices, this only applies to physical oil trading. For derivatives like CFDs, prices can never go negative. This opens opportunities for retail traders to profit from the market’s sharp volatility.

Trading strategies in volatile markets

With trading sessions fluctuating 10-30%, oil investors can use two main approaches:

First, short selling (short selling) when believing prices will continue to fall. This is a major advantage of CFDs — allowing profit from declining markets. Combined with leverage, investors can significantly increase returns.

Second, bottom fishing. Since crude oil cannot stay cheap forever, technical analysts can identify support zones where prices are likely to rebound. Confident in a recovery, traders can wait for opportunities to enter long positions.

CFDs: The ideal tool for investing in crude oil

To profit from oil without owning or storing it, most investors today choose contracts for difference (CFD). The mechanism is simple:

• If you predict WTI will rise, place a buy (Long) order at a low level, then sell when the price increases to realize profit.
• If you expect a decline, place a sell (Short) order at a high level, then buy back at a lower price.

Each CFD trade incurs costs, mainly three types:

Spreads (bid-ask spread): The difference between buy and sell prices. Different trading platforms offer different spreads. A good platform has narrow spreads, saving costs.

Commissions (fees): Some platforms charge a commission per trade, others do not. This is an important factor when choosing a broker.

Swaps (overnight fees): Holding a position overnight incurs interest fees. These vary depending on the platform.

For example: trading USOIL with a spread of $0.17, a profit of $10 from a trade will be reduced to $9.83 after costs.

Why CFD is the optimal choice for retail investors

There are many ways to start investing in crude oil — buying shares of exploration companies, trading futures contracts, options, or ETFs. However, CFDs stand out most for those wanting to benefit from the strong price swings of crude oil.

Advantages of CFDs:

✔️ No need to own physical oil — No worries about storing physical commodities, just trade the price movements.

✔️ Profit from both rising and falling markets — You can make money whether oil prices go up or down.

✔️ Leverage to amplify profits — With $1, you can control contracts worth up to $100, increasing profit potential by 100-200%.

✔️ Lower risk scale — Compared to futures or options, CFDs allow trading with smaller volumes, suitable for beginners.

✔️ 24/5 market access — Trade crude oil 24 hours a day, with no time zone restrictions.

✔️ No expiration date — Unlike futures, CFDs let you hold positions as long as you want.

Conclusion

The crude oil market is a world full of risks but also abundant opportunities. Prices fluctuate due to countless factors — from global supply and demand, OPEC policies, to USD exchange rates. These factors constantly change, creating attractive trading opportunities.

If you want to start investing in crude oil but are concerned about risks or lack large capital, CFDs are the most suitable choice. They offer flexibility, lower costs, and are especially suitable for individual investors looking to capitalize on market volatility in crude oil prices.