Trading the Crude Oil Market. Brent vs WTI: Is There a Difference?
Valutrades gives you the opportunity to trade the Crude Oil Markets on their MT4 and MT5 platforms.
So? What are these oil markets?
Brent Crude, as the name suggests, represents the oil pumped from the North Sea between Scotland and Norway, from the Brent Oilfield. As the Brent oilfield is closest to the UK’s Shetland Islands, we refer to the trading instrument as UKOil which you will find on your MT4 and MT5 platforms. Brent Crude is categorised as a light, sweet crude which is ideal for refining into fuels.
West Texas Intermediate (WTI)
WTI is found on your platform as USOil and it is also a light, sweet crude. It is mostly from land-based sources in the Permian Basin in Texas and New Mexico and it is also called NYMEX in trading circles. Most of this Crude Oil is stored in tanks in Cushing, Oklahoma and it is there that the price of WTI is established.
You will note on your charts that the price of WTI is generally less than that of Brent as WTI is cheaper to produce and store. There are traders who monitor the difference (the WTI/Brent spread) and trade it but that is a topic for another blog.
As you can see from the two charts, price action is almost identical between the two instruments with only a few odd exceptions.
Fundamental Analysis of the Crude Markets
If you have learned anything from the Valutrades lessons, videos and blogs, it is that price movement is about supply vs demand. Oil, as a commodity, is no exception. When oil is in demand, the price rises. When demand falls, the price falls. When the supply (inventory) of oil rises, prices fall. When supply falls, prices rise. Simple…or is it?
When OPEC (Organisation of Petroleum Exporting Countries) members meet, they often decide on production levels. Analysts and traders watch these meetings and try to read about rumours beforehand. If OPEC calls for a production cut in the future, prices rise. If they call for higher production (higher inventories) prices will fall.
Another area to watch is the perceived demand by large economies. By large economies, we are usually referring to the US and China. Any sign of economic trouble in either of these regions will signal a future demand drop and prices will fall. The contrary is true of course.
As you can imagine, the biggest mover of Crude prices in history was the global COVID pandemic. The chart below shows the price action in WTI at about $8 per barrel on the spot market to $75 recently. On the futures market, which is the most important for buyers of oil, the price went lower than -$40 per barrel. You literally could not give it away!
Geopolitical tensions and disasters like floods and earthquakes not only affect gold but also affect crude prices especially if the region is an oil producer. If you are paying attention, often these problems are temporary and can give us trading opportunities. As usual, however, always trade in the direction of the trend.
Like any instrument you trade, you should always follow the fundamentals first, then the technicals. Technical analysis on WTI and Brent is not much different from any other instrument and the Valutrades MT4 and MT5 platforms give you all the tools you need.
To be fair, gap trading is actually a combination of both technical and fundamental analysis. The gap is always caused by a fundamental event, usually when markets are closed but when the gap is filled, we follow technical indicators on our charts.
In the case of these two charts, price action filled the gap with indications in play when price action tried to fill the gap from the top. We see two bearish engulfing candles and a downturn from overbought on the Stochastic Oscillator.
Price action chart patterns like Double Tops, Pennants, Wedges, and Descending Triangles, all work well with crude oil.
Like anything, traders always want confirmation before they enter a position and technical indicators are important. Here, for example, we are using the Stochastic Oscillator to confirm the reversals of price action off a level of support and off the upper trend line.
The indicators can also be used to confirm the exiting of positions as well.
In these daily charts, we can also use MACD to spot the reversals. The yellow boxes indicate where the signal line left the MACD histogram, corresponding with price action reversals, aligning perfectly with the stochastic oscillator.
If you have been trading for any length of time, you would have tried Fibonacci retracements. Of course, they don’t always line up but, when they do, they can be an incredibly reliable source for spotting levels of support and resistance.
In this chart, all Fibonacci levels corresponded with key levels and reversals were confirmed by the stochastic oscillator. Feel free to experiment with different confirming indicators until you find a system that works for you.
The Canadian Dollar
Of all the oil-producing countries the Canadian dollar is the most affected by movements in crude oil prices. In the chart below, we see that USDCAD is inversely correlated to WTI. That is, when the price of crude rises, the value of CAD increases in tandem.
Therefore, you may trade CAD pairs on fundamental events like Crude Oil Inventories and OPEC meetings. This is not a perfect science, of course, as CAD will still react to other factors such as employment, interest rates and the currencies on the other side of each pair.
The Economic Calendar
In closing, always check an economic calendar before you trade but don’t be fooled when you see Crude Oil Stocks in the list of events. For lack of any alternative, it is always listed as USD. The figures will likely never affect USD. The figure will, of course, affect USOil, UKOil and CAD pairs.