How to trade oil
If you want to learn how to trade oil you first need to understand the basics of oil, how oil is produced, the products oil creates and the different factors that affect the price of oil. Once we cover these topics we will discuss how you can trade oil and profit from the volatility and price fluctuations that occur in this highly lucrative market. Once you understand these basics you will be on your way to learning how to trade oil effectively in the market today.
Oil is a very important commodity in our society today. Oil is used in the manufacturing of many products from plastic bottles to makeup; manufactures rely on petroleum based products to create and manufacture many different types of goods.
Oil or “Crude oil” is refined into different products once it is out of the ground. These products include: gasoline, diesel, kerosene, fuel oil, heating oil, aviation oil… These different products all come with their own separate price tag dependent on different factors.
Oil is a true international business and is currently depended upon from Countries all around the world. Oil is the most consumed energy in the world and plays an important role in our daily lives. There are many different factors that affect the price of oil, let’s look at the main factors that affect the price.
Supply and demand
Just like other products the supply and demand of a product plays a large role on the price tag. For instance if the supply of oil decreases and demand stays neutral or increases, oil becomes more expensive. The latter, if the supply increases and demand stays neutral or decreases, oil becomes more available and price cheapens. You can see this situation currently occurring with the WTI(Western Texas Intermediate) oil which has been over produced and under refined due to a lack of proper transportation infrastructure and a significant increase in oil production from areas like the Bakken Oil play.
When looking at economic growth as a factor contributing to oil prices it’s difficult to judge. We need to not only look at our region for growth but the entire world. If our economy grows the demand for oil increases and if our economy slows in growth the demand for oil will reflect this growth and have less of a demand.
Weather is a much easier pattern to predict as a factor that influences the price of oil. Seasonally there are two main months that effect oil and gas consumption- winter and summer. It is a known fact that the price of oil increases in continents such as Europe and North America because consumption increases in the cold winter to heat the house thus increasing the price of heating oil/ fuel oil. Fast forward to the Summer time and we see an increase in gas consumption with more vehicles on the road throughout Western countries which drives the price up as well.
New Energy sources
The development of new energy sources is an interesting topic and one that should be weighed when taking a much longer term view on the price of oil. What we can acknowledge is the innovation around creating sustainable energy sources for the future. If a new energy source is found in which acts as an alternative source of energy the supply and demand of oil will be effected.
OPEC (Organization of petroleum exporting countries)
OPEC has the ability to set the price of oil based on production. If production is up or down they will set the price accordingly to the supply of their inventories. OPEC meets on occasion and has an announcement that is made public on whether they will increase or decrease their reserves. News from this announcement has a great effect on the price of oil as the country members that make up OPEC contribute to a significant size of the world’s oil supply. 11 members currently make up OPEC- Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Venezuela and the United Arab Emirates.
Today we see a true connected global world where news has a corresponding effect on markets. This is even more so for the oil industry as lately there have been many concerns and unrest in countries like Libya, Kuwait, Iran… This news has a large effect on oil prices. With war, terrorism, political unrest, changes in leadership, we see oil shooting up rapidly as production is down.
Now that you understand and are aware of the external factors that have an influence on oil futures and oil traders it’s time to assess the different markets and exchanges we can trade oil on and some of the ways we can profit from price fluctuations and volatility. You can trade oil on the futures exchanges around the world such as: New York Mercantile Exchange (NYMEX), International Petroleum Exchange (IPE), Singapore Monetary Exchange (SME), Tokyo Commodity Exchange (TOCOM), Intercontinental Exchange (ICE). You can also profit from oil prices investing in ETF’s(exchange traded funds) or oil production companies that are publicly traded. You need to be careful as investing in the companies and ETF’s involve a different analysis in comparison with oil futures because they are made of companies that require fundamental analysis to determine underlying value. We can help you with all of this! RIG magazine publishes a monthly magazine that features the latest updates that have an effect on oil prices and oil futures prices and is used by many professionals around the world to gain more insight into economic conditions, OPEC announcements, oil production analysis, oil company analysis and so much more. This is a free resource which you can subscribe to now, just type in your name and email below to subscribe right away: