How To Trade Oil?

Learn everything you need to know about speculating on the oil markets.

Trading Oil

Oil has a significant impact on the world economy because it is used in manufacturing, transportation, and energy generation. Its supply is unpredictable and limited, making it one of the markets with the fastest turnover.

The trading opportunities that exist in this volatile market are frequently not fully utilized by traders due to their lack of understanding of the specific characteristics of the oil market.

What are the types of oil traded?

Oil is a natural resource that can be found in underground oil reserves. It develops as a result of the millions of years of fossilized plant and animal remains being buried under layers of sand and rock.

The US, Scandinavian nations (North Sea), and OPEC (Organization of Petroleum Exporting Countries) nations like Saudi Arabia and Iran are among the nations that produce oil.

There are two types of oil used as benchmarks in oil pricing: WTI and Brent oil.

1. WTI
The term “West Texas Intermediate” refers to crude oil that is obtained and produced in the United States. Additionally known as “Texas light sweet.” It is “light” because it is less dense than the majority of crude produced by OPEC, and it is “sweet” because the sulfur content is lower.

2. Brent crude
Also referred to as simply “Brent,” Brent oil is the oil obtained and produced in the North Sea. Brent is also described as light and sweet like the WTI oil.

WTI & Brent Oil Price Correlation

While West Texas Intermediate used to be more expensive than Brent, this has changed as oil drilling and fracking technology improved. Because of the decline in the cost of oil production and the consequent reduction in US reliance on oil imports, this is also referred to as the US shale revolution.

Although the prices of the two types of oils are closely correlated, a pricing anomaly could arise if one type of oil appreciates while the other depreciates. For instance, in February 2011 (when WTI traded at 85 USD per barrel and Brent traded at 103 USD per barrel), the difference in price between WTI and Brent reached more than 15 USD.

WTI – Brent Oil price correlation 2011 – 2017

WTI’s depreciation was caused by the increasing oil surplus in interior North America at the time and Brent’s appreciation was caused by the civil unrest that existed that time in Egypt and the Middle East.

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What drives the oil prices?

Oil is one of the most heavily traded global commodities with no shortage of news causing the oil market to move on a daily basis.

Here are the key factors that affect the price of oil:

1- Extraction and refining

Crude oil must be extracted and refined, both of which are expensive processes. It requires a lot of work to extract crude oil from the ground because oil reserves are found deep underground. The price of oil directly correlates to any technological advancement or failure in the extraction process.

2- Consumption and demand

The United States is the top oil consumer, followed by China, Japan, and advanced European nations like Germany and the United Kingdom. These countries have substantial industrial and economic needs for crude oil, and as a result, their industrial requirements may have an impact on world oil prices.

3- Accessibility and supply

No matter how abundant the supply, political and economic factors can affect accessibility. By making the product inaccessible or unaffordable for those affected, rising inflation, unemployment, and poverty rates can lead to a decline in consumption. Oil imports may be reduced as a result of political unrest, and imported goods may be taken over.

4- Natural disasters and accidents

Natural disasters like earthquakes and storms are unpredictable occurrences, and the harm they do to refineries and drilling sites can slow or stop oil production. Production delays occur during the recovery period as a result of fires and mechanical failures or malfunctions. The delays these situations may bring about will lead to a reduction in oil supply, which will raise the price.

Key oil reports to follow

There are two oil reports that you should acquaint yourself with and regularly refer to.
1- DOE Oil Inventory

The Department of Energy Oil Inventory report is released every Wednesday and measures the stockpile of oil in the U.S. Since the U.S. is the largest oil consuming nation, it is important for oil traders to regularly check their demand rates by referring to the amount of stock left in their oil inventory.

2- OPEC Oil Market Report

The second oil report you should study is the OPEC monthly and annual reports. These reports provide insight on the production targets of OPEC countries. Their production targets and quotas reflect the current levels of supply and demand of oil in the world market.