If you’re unfamiliar with oil investing, the market’s volatility likely gives you pause for concern. Even though traders recognize high volatility in any market as an opportunity to potentially generate profits off of trades, unpredictable and extreme volatility can be unnerving and discouraging. With high rewards come high risks, and if you don’t understand the factors at play, your investment strategy is hardly more than gambling.
But even with the sometimes erratic price swings seen with UKOil and other oil holdings, traders can use strategic trading products to take advantage of this volatility, thus creating potential gains while hedging and using stop losses to minimize their losses.
First, though, it’s important to understand the complex market factors affecting the price of UKOil.
Tracking Global Crude Oil Market Factors
Like any commodity, crude oil is affected by global supply and demand. An oversupply caused by excessive production, for example, can cause prices to fall—especially when that oversupply is paired with declining demand. On the other hand, a limited supply of crude oil combined with escalating demand from the global market can lead to a surge in prices as countries bid against one another to maintain their incoming supply.
Put simply, supply and demand is further influenced by many factors. While OPEC coordinates crude oil production to help stabilize the market and support efficient practices throughout the petroleum industry, a number of different political and economic factors can affect UKOil prices.
Even with this coordinated effort to stabilize the market, dramatic price movements regularly occur. This 12-month view of UKOil’s price shows how volatile the market for oil commodities can be:
Economic recessions, either in major foreign economies or on a global scale, typically lead to reduced demand and a depression of oil prices. Similarly, political feuds between nations, as well as full-on escalations into war, can create tensions that restrict the ability for oil to cross certain international borders, thus limiting the free flow of oil supplies and affecting global oil prices.
Even unforeseen events such as political coups, global sanctions or a wave of terrorist attacks can grind oil production and/or national demand for crude oil to a halt, thus resulting in dramatic upheavals to the oil market.
All of these factors have the potential to create or exacerbate volatility for UKOil prices, creating a high-risk, high-reward trade proposition for investors.
Profit Off of UKOil Through Energy-Based ETFs
The price movements of UKOil and other oil-based assets can have a ripple effect on other energy-based assets. Because of this, traders looking to open positions with UKOil sometimes prefer to invest in energy-based ETFs either in combination with buying UKOil, or as an alternative trading strategy.
With these energy-based exchange traded funds, traders can enjoy some of the benefits of oil’s price movements as it affects the value of these energy funds. Since the price of UKOil can affect the price of other oil companies, ETFs allow you to invest in those companies and potentially generate better value from your investment, depending on how UKOil’s price moves over time.
At the same time, these ETFs make it possible to diversify your oil and energy holdings in addition to your UKOil acquisitions, without the high commission fees that come with diversifying your holdings on your own. Traders regularly purchase ETFs to hedge their downside risk when they’re holding UKOil or similar oil assets.
Read the Crude Oil Reports as Soon as They Come Out
Weekly reports on crude oil inventories around the world are a critical source of data that traders should monitor. Because price action can happen fast based on the information in these reports, traders should track the report release dates and times and get them from the source to get as much lead time as possible to take action with trades.
The OPEC Monthly Oil Market report can be a valuable resource for UKOil investors, and the U.S. Energy Information Administration offers a number of resources, including its “This Week in Petroleum” report, that offer information about foreign oil markets.
Experienced petroleum traders may even find value in the weekly reports from the American Petroleum Institute and U.S. Department of Energy. While these reports tend to focus primarily on American oil production and inventories, this information can have a corresponding effect on UKOil prices, and savvy traders could use this information to predict how UKOil prices might respond.
UKOil’s potential price movement makes it an attractive option for any trader looking to reap large profits from commodities trading. But this large potential reward comes with considerable risk, especially with so many economic and political factors coming into play—some of which can develop unpredictably, frustrating even the most experienced traders.
Because of this price volatility, it’s recommended that traders study up on the complexities of the global oil market before getting involved in trading at a large volume.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.