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Oil Trading: How to Trade One of the Most Volatile Commodities

    

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On the surface, the oil market presents something that is both confusing and complex, as its sheer volatility (and prior bad press) has worked to put off many an investor in the past. When it comes to oil, risk is always going to be something that traders have to contend with, but that doesn’t mean that you should necessarily run a mile when the market crosses your path.

Due to its standing within the world’s economic and political systems, along with its high liquidity, oil trading is still something that should carry appeal to active traders. With a sharp eye and knowledge of the market, oil can easily make up a key element within your investment portfolio. Helping you to make that a reality, the following looks at exactly how you can successfully trade one of the most volatile commodities around.

Understanding the Types of Oil Traded

When choosing to trade oil, what you are going to face is choice, as the commodity can and will come in a number of different forms. Before you jump feet first into the world of oil commodities, it will pay to develop a formula and commit the following oil types to memory.

West Texas Intermediate (often traded as USOil)

Containing low amounts of sulphur and being of a low density, West Texas Intermediate (WTI) is an oil type you are going to hear a lot about should you choose to trade oil online. With a sulphur content of just 0.24 percent, WTI is classified as a light crude oil, with the refining of such largely being handled in the Gulf region and the United States.

Brent Blend (often traded as UKOil)

Another commonly discussed type of oil is Brent Blend, with the name coming from the geographical location where the oil is actually extracted, the Brent oil field in the North Sea, near Scotland. Labelled as “sweet oil”, Brent Blend is usually used for making petroleum and gasoline for vehicles.

Dubai Crude

The clue is in the name, as Dubai Crude comes from Dubai, which is one of the largest oil-producing nations in the world. Carrying a light density, Dubai Crude has a sulphur content of 2 percent.

Russian Export Blend

Russian Export Blend—as you can imagine—is the true standard of Russian crude oil. What it also represents in the eyes of many is the perfect example of sour oil, as it contains a noticeably high amount of sulphur. Russian Export Blend is largely exported to Italy and the Netherlands.

Breaking Down The Major Consuming Nations

Globally, the largest consumers of oil are the world’s most advanced and developed industrial nations. These nations include the United States, Germany, Russia, and the United Kingdom. However, over the past few decades, several nations from Asia have become officially classified as major oil-consuming nations, including China and Japan.

When trading oil, it pays to keep an eye on the major consuming nations, as any increase or decrease in usage is sure to have an impact on the commodity’s performance. Something that is also worth monitoring—with this tying into the performance of major consuming nations—is OPEC, the Organisation of the Petroleum Exporting Countries. This international organisation works to ensure the stabilisation of the oil markets, along with coordinating and unifying petroleum policies. Current members of OPEC are mass-producing oil nations (14 in total, including Saudi Arabia, the United Arab Emirates, Iran, Iraq, and Qatar). Considering that OPEC has the power to decide policies related to the production and sale of petroleum oil, it certainly has the power to impact the price, flow, and distribution of oil worldwide.

Learning About What Moves Crude Oil

Much like any other commodity, oil’s value can largely be attributed to supply and demand. Worldwide output, along with global economic prosperity, can also influence the movement of crude oil. When oversupply and diminishing demand occur, traders sell—often bracing for impending losses. However, when a decline in production and rising demand occur, the price of oil rises.

Looking at what moves the price of crude oil, should you look back through the history books, you’ll find that tight convergence of positive factors can create powerful uptrends. For example, in 2008, the price of crude oil surged to a price of more than $145 per barrel. As you can imagine, matters can also swing in the other direction. When negative factors grip oil, the price of oil can plummet. A prime example of this occurred when the price of oil went beyond just a “dip”, as it crashed down to $37 per barrel in value in February 2016.

Weighing Up Commodity Volatility

As you can imagine, the fact that oil carries a number of major uses generally means that not only is it one of the most traded commodities in the world, but it’s also one of the most volatile markets as well. For traders specifically, this means that profit-generating opportunities are at hand. The key matter that any trader needs to weigh is commodity volatility, as major factors can twist the price of oil in a very short space of time. An example of how this can occur was widely reported back in 2008. In June 2008, the price of oil hit a high of $145, yet by December of that same year, the price of oil dropped to approximately $30. What this should tell any trader is that commodity volatility is something that he or she will have to navigate, as price swings are notoriously common.

Something else that any active oil trader must factor into the equation is the correlation between both gold and oil, along with oil and the US dollar. In the case of oil and gold, the relationship between the sharpest rises and falls in oil prices are usually accompanied by large changes in the price of gold. History also dictates that the fall in the price of crude oil can coincide with the strength of the dollar. Both of these factors present something to bear in mind.

Conclusion

Oil is not only one of the most volatile commodities in the world, but it’s also one of the most commonly traded. That being said, it shouldn’t ever be a commodity that traders fear. What any investor should take away from the above is that WTI and Brent are the most traded oil formats in the world and that prices are determined largely by a varying degree of supply and demand factors.

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Disclaimer:

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.

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