Crude oil is one of the most important commodities in the world. Every day, more than 100 million barrels of crude oil is consumed around the world. At today’s price, that’s worth more than $6 billion. And technology has made it possible for anyone to trade crude oil whenever they are. This article will guide you on how to trade the commodity.
What Moves the Price of Oil
To become a successful oil trader, it is important to first understand the factors that move its price. Like all commodities, the most important aspect that affects the movement is demand and supply. When supply of a commodity increases, the price tends to fall. When the demand rises, the price tends to rise. The same is true among all financial products like stocks and indices. In stocks, when more people want to own a company, the stock price tends to move up. When more people wants to sell stocks, the price tends to fall.
There are a number of factors that influence the supply of crude oil. First, when oil producing countries decide to slash production, the result is that it could lead to slow supplies. If they decide to boost production, the price will likely decline. A good example of this is what happened in 2013, when OPEC decided to bring down the price of crude in a bid to halt the US production. This was a flop because US producers improved their cost structure. When OPEC announced that it would reduce production, the price started to move up.
Second, geopolitical issues such as conflicts in the main oil producing countries could disrupt the supply chain of oil. This would in turn lead to lower supplies. Third, when there is a fire at a large refinery, it could affect the price. Other factors are weather conditions, oil embargoes, and sanctions.
How to Trade Oil
After understanding the main factors that affect the price of crude oil, it is now important for you to understand how to trade the commodity. First, you need to have an account with a broker who offers WTI Crude and Brent Crude futures. These are the two most common oil benchmarks.
Second, you should read widely so that you can understand the current situation in the crude oil market. A good way to do this is to search for oil news in the main business websites like Bloomberg, Wall Street Journal, and Financial Times. Taking time to read the recent news will help you understand the main issues in the oil market. Most importantly, you should pay a close attention to the inventory numbers, which are released by the EIA and API every Wednesday and Thursday.
Third, you should then master the art of technical analysis. This is because technical analysis will help you know where to enter, how to enter, and when to exit the trade. There are hundreds of technical indicators that you can use. A good way to approach this is to first use trend indicators to identify the formation of a trend. Examples of these are moving averages, Bollinger Bands, and Parabolic SAR. After identifying a trend, you should then use oscillators like Relative Strength Index and MACD to identify whether the price is overbought or oversold.
Fourth, you should confirm the trend using the volumes indicators such as Accumulation/Distribution and Money Flow Index. Finally, you should use the Fibonacci Retracement tool to know the exact levels where you will place the trade and where you will exit.