Crude oil is the leading energy source of the world’s economy. The world’s most used products such as gasoline, diesel, wax, lubricants and other petrochemicals are refined from crude oil.
With many high-demand products that can be manufactured from it, this makes crude oil one of the world’s most important commodities. It’s the very reason why crude oil is a very popular commodity to trade.
Trading oil might really interest you, but let’s first present the fundamentals that you need to know about trading this commodity.
The Side of Supply
Being an active learner will always put you ahead of anyone that doesn’t bother with all the important details. When trading oil, be aware of the movements that occur in the oil industry as these directly affect oil prices.
Key refineries and the Middle East
Investors must be updated on what’s happening on the key refineries around the world, as well as political situations in the Middle East. News and happenings on these specific areas, whether good or bad, will have a significant impact on oil’s global prices.
OPEC (Organization of the Petroleum Exporting Countries)
Investors must be aware of OPEC’s latest decisions. Their production cuts or extensions can shift the cost of oil. As early as possible, investors must adjust their next trading decisions according to the organization’s decisions.
Oil Suppliers
The world’s major oil suppliers are also an important factor to watch out for because their movements are in sync with OPEC’s decisions. Their movements add clarity to the information gained from the two factors mentioned above. With this added factor, investors can have a reliable information on the state of the world’s oil supply and where it is heading.
The Side of Demand
Seasonality
Yes, investors must also watch out for the shifting seasons. During winter, there’s an expected spike in oil usage because people use it as a heat source to their houses. On the other hand, a hot summer also causes the consumption of oil to spike up.
Every season serves as a signal for investors on the upcoming movements of the oil’s usage. Therefore, it also serves as a signal for investors whether to change or retain their trading plans.
Oil Consumers
There are established global oil consumers such as the United States and Europe because of their vast and active economies. But investors should also take note of the rising economies around the world, especially the ones that are rapidly rising.
Their growing economies would also make them big-time oil consumers. Thus, they are now in a perfect position to significantly affect oil prices. This gives investors a reason to watch closely on their economies because any halt in their economies’ growth can affect the oil prices.
Strategies and Tips for Oil Trading
Every seasoned trader started from the basics of oil trading, so should you. It is in every investor’s best interest to determine a trading strategy that perfectly fits his trading style. This is only possible if he can understand the important factors that move the value of oil. Ignorance in the world of trading is an expensive liability to have.
The trading strategies used on other types of trading must also be used in oil trading. Risk management and efficient use of leverage must also find their way in the oil trading arena.
It is also crucial to incorporate fundamental and technical analysis to make your oil trading venture a disciplined and profitable one for you.
Having a solid understanding of the factors that move the price of oil will serve as a key element for oil traders to find entries in the market. With this, they can establish efficient risk management techniques when a buy or sell has been determined. This outcome is possible with the aid of technical analysis.
Above the Basics
Seasoned traders can use alternative information like futures curve to visualize a future demand. To gain important benefits on forecasted high volatility moves, investors can use options to unlock its potentials.
When investors study the futures curve, they should look for two important factors: if the market’s state is in contango or backwardation.
Let us define these two factors:
Contango – It means that the upcoming price of a particular commodity is higher than the expected spot price.
Backwardation – It is when the spot price is higher than the forward rate for a particular commodity.
Other factors that you should consider when trading oil:
CFTC/Speculative positioning
The Commodity Futures Trading Commission Report (CFTC) is a crucial factor when trading crude oil futures. It is a reliable ‘compass’ in determining the direction of oil prices; it is closely related to market dynamics.
The shifts in the CFTC money net positions usually come first before any moves in the global oil prices.
Trading via Futures and Options
A trader must know the correct exchange to use for the oil benchmark he wants to use. This is an important consideration and measure before buying futures and options.
A high number of exchanges have filters or criteria for who is authorized to trade on them. That’s why we see professionals are managing most of the futures speculation.
Oil Trading Exposure
An investor can get exposure to oil trading without being narrowed on an individual market. They can get oil trading exposures through ETFs, or Energy-Based Exchange Traded Funds and shares on oil companies. The prices of oil sway the number of oil companies and ETFs, and it can sometimes provide investors with more profitability.
If you’re planning to invest in ETFs, Energy Select Sector SPDR (XLE) Vanguard Energy ETF (VDE) and United States Energy Fund (USO) are the major ETFs to look out for.
Key Reports
Reports of oil inventories give investors an idea about where the demand for oil is heading. These reports should be incorporated with the all-over monitoring scheme of an investor. The lack of this crucial piece of the report might spell a costly trading mistake for an oil trader.
Here are the most reliable sources you can follow to gain the latest information on oil inventories:
American Petroleum Institute (API)
It highlights the most relevant petroleum products that make up for more than 80% of the overall refinery production through its weekly statistical report.
Data Release: Tuesday at 16:30ET/21:30/15:30 London time
Department of Energy (DoE/EIA)
It has updated reports on the state of inventories of crude oil and refined products. It also provides the latest data on the globe’s current oil supply.
Data Release: Wednesday at 10:30ET/15:30 London time.
Also read: Commodity Market Tips for Beginners
