Crude Oil

Definition of Crude Oil

What is crude oil?

Crude oil is one of the most important commodities traded on the open market. It is unrefined petroleum that is used to make diesel, gasoline, and other fossil fuels. Because crude oil is a nonrenewable source, in recent years, much progress has made in finding alternative energy sources – including solar and wind – which will never be in danger of running out. As a result, it is difficult to know how much longer crude oil will be considered a critical commodity. However, for now, it certainly is, and many countries are major suppliers, including the United States, Russia, and Saudi Arabia. Crude oil prices generally reflect WTI (West Texas Intermediate) oil, which is primarily drilled in the United States, and the European Brent Crude. The third major benchmark is the OPEC Basket.
Like most commodities, the price of crude oil is driven primarily by supply and demand, and is extremely vulnerable to external factors. At times, for example, members of OPEC (Organization of Petroleum Exporting Countries) have decided to limit production of oil, causing the global supply to dwindle, and the price of oil to rise. Alternately, when oil-rich countries (OPEC and others) are producing excessive amounts of oil, the supply outweighs the demand, and the prices can drop.

How does one use crude oil?

While some traders purchase spot contracts on crude oil (in which ownership of the oil changes hands at the moment, and the price reflects the cost of crude at that moment), it is far more common for traders to purchase futures contracts on oil. With futures contracts, the price agreed upon reflects what both the buyer and seller believe will be the price of oil at a predetermined future date. Those who trade on oil CFDs are essentially predicting how the price of oil will move before the position closes.

Links related to crude oil
Brent crude (EB)
Close a position
Futures contract
OPEC Basket
Spot
WTI crude (CL)