Oil in Forex is one of the most traded commodities in the world. Trading oil in the financial market is measured by barrels, and oil’s daily trading volume exceeds 100 million barrels. The price fluctuations in oil have a direct impact on global economies, currencies, and financial markets. Traders have successfully incorporated crude oil trading into their strategies because of its high volatility and strong correlation with major currencies, particularly the U.S. dollar. Understanding how oil trading works in forex, the symbol for oil in forex, and the best strategies to trade oil can help traders maximize profit opportunities. In this article, we’ll explore how to trade oil forex, its forex symbol, and the different ways to trade crude oil in the forex market.
What is Oil in Forex?
Oil in forex is traded under the commodity category (energy sector); it refers to the process of trading crude oil as an asset within forex platforms. Unlike traditional forex pairs like USD/JPY, crude oil is not a currency but a commodity. However, traders can still speculate on its price movement using financial instruments such as Contracts for Difference (CFDs), Futures, and Exchange-Traded Funds (ETFs). Oil prices can also show volatility in the financial market and it can happen for various reasons. For example, when oil supply exceeds demand, prices drop, and vice versa. Conflicts in oil-producing regions can also cause a spike in oil prices, for example, the Middle East. Furthermore, reports like the U.S. Energy Information Administration (EIA) crude oil inventory reports influence price movements, and OPEC, which is short for the Organization of Petroleum Exporting Countries, plays a major role in controlling oil production as well as its prices.
Well, you may be wondering about what the relationship between oil and Forex markets is, in simpler words, oil prices and currency values are often correlated. For example, the Canadian dollar is strongly influenced by oil prices since Canada is one of the world’s largest oil exporters. Typically, when crude oil prices rise, the CAD/USD pair often strengthens, benefiting the Canadian economy. Similarly, oil-importing countries like Japan and India may see their currencies weaken when oil prices surge, as higher oil costs impact their trade balance.
What is the Forex Pair For Oil?
Oil in Forex is traded under specific symbols, the two primary crude oil name in forex standards available for trading are West Texas Intermediate, shown as WTI/USD in the New York Mercantile Exchange (NYMEX), and Brent Crude Oil shown as BCO/USD or UKOIL in the Intercontinental Exchange (ICE). Furthermore, Brent Crude Oil is used as the global oil price benchmark and affects 70% of oil pricing.
Now that we mentioned oil prices, let’s talk about the historical price movements of oil in forex during the global pandemic COVID-19 in 2020.
As the pandemic spread globally and lockdowns started here and there, the demand for oil supply dropped sharply. Travel restrictions, economic slowdowns, and manufacturing shutdowns caused a significant reduction in the need for fuel, leading to falling oil prices, and by March 2020, oil prices were already in a freefall.
2020 wasn’t a good year for oil because right after this incident a price war disrupted between Russia and Saudi Arabia, technically, OPEC and Russia couldn't agree on production cuts. Saudi Arabia flooded the market with oil in an attempt to maintain its market share, exacerbating the price decline. This massive oversupply caused the prices to drop even further.
The situation reached a dramatic low in April 2020, when U.S. oil prices (specifically West Texas Intermediate, or WTI) briefly turned negative in futures contracts for the first time in history. On April 20, 2020, the May contract for WTI crude fell to -$37.63 per barrel, meaning traders were effectively paying to store oil, as there was a severe oversupply and nowhere to store the excess oil due to decreased demand and full storage capacity. This was a highly unusual and unprecedented market event, as oil prices had never before gone negative
By the second half of 2020, oil prices began to recover as the world adjusted to the pandemic and efforts like vaccine development raised hopes of a future economic recovery. Additionally, oil-producing countries also agreed to production cuts to help stabilize the market and by December 2020, oil prices had moved back into positive territory, with WTI rising back to around $45-50 per barrel.
Can You Buy Oil in Forex?
Shortly, yes, traders can buy and sell crude oil in forex, but they do not physically own barrels of oil. Instead, they trade oil through financial instruments that track crude oil prices, such as CFDs. These allow traders to profit from price movements without the need for storage or transportation. For example, a trader speculating that oil prices will rise can buy USOIL at $80 per barrel and later sell it at $85 per barrel, making a profit of $5 per barrel. Conversely, if prices fall, the trader incurs a loss.
What Are the Ways to Trade Oil in the Forex Market?
There are several methods to trade crude oil in the forex market. Each method offers different risk levels, trading strategies, and capital requirements.
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Trading Crude Oil CFDs
Contracts for Difference (CFDs) are one of the most popular ways to trade oil in forex. CFDs allow traders to speculate on crude oil price movements without owning the asset. Traders can go long (buy) if they expect prices to rise or go short (sell) if they anticipate a price drop. Example of Oil CFD Trade:
• A trader buys 10 contracts of WTI crude oil index as CFDs at $75 per barrel.
• If the price rises to $80 per barrel, the trader earns $5 per barrel.
• If the price falls to $70 per barrel, the trader loses $5 per barrel.
CFD trading offers leverage, allowing traders to control larger positions with a smaller capital. However, high leverage also increases risk, making risk management essential.
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Oil Futures Trading
Oil futures contracts are agreements to buy or sell crude oil at a predetermined price on a future date. Futures trading is widely used by institutional investors and professional traders.
Example of Oil Futures Trade:
• A trader buys a WTI crude oil index as a futures contract at $78 per barrel with an expiry in 3 months.
• If oil prices rise to $85 per barrel, the trader profits from the price difference. Futures trading requires higher capital and involves risks related to contract expirations and margin requirements.
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Oil ETFs (Exchange-Traded Funds)
Oil ETFs provide indirect exposure to oil prices by tracking crude oil indices. Some of the most popular oil ETFs include:
• United States Oil Fund (USO) – Tracks WTI crude oil index prices
• Brent Oil Fund (BNO) – Tracks Brent crude oil prices
ETFs are suitable for long-term investors who want to gain exposure to crude oil without engaging in short-term speculation.
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Oil Options Trading
Oil options give traders the right, but not the obligation, to buy or sell oil at a set price before the contract expires. This method is useful for hedging and risk management.
Example of Oil Options Trade:
• A trader buys a call option for WTI crude oil at $80 per barrel with a strike price of $85.
• If oil prices reach $90 per barrel, the trader exercises the option and profits. Options trading requires an understanding of strike prices, expiration dates, and volatility.
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Investing in Oil Stocks and Energy Companies
Another way to trade oil indirectly is by investing in energy sector stocks. When crude oil prices rise, energy stocks typically increase in value.
