Crude oil remains one as the most valuable traded commodities in the world. Because of its unique nature of being very actively traded, it affects very many things. Trading crude oil affects the price of other products including gasoline and natural gas. As a result, the prices of stocks bonds and currencies in the world are almost directly linked to crude oil trading. With scientists exploring the possibility of using renewable energy, crude oil is still the greatest source of energy in the world.
The crude oil trading industry is very active and consequently, it is one of the most sort after commodity to trade on future contracts in the world. The prices of oil are affected by the slightest news regarding the market. This way the opportunistic day traders wait for a perfect time to make a move. Focusing on the volatility of this market creates opportunities of making great profits. However, sometimes people make big losses in these swings.
Crude oil trading gives provision for profitable opportunities. It is set up in a unique ecosystem surrounded by political and economic systems. As a result, in most markets trading in crude oil is mostly a profitable venture. With that said the energy sector experiences very high levels of volatility in recent years. This simply means that you can make large returns with swing trades within a short period of time. Most of the time you have to be a very strategic market participant to make the profits.
In many circumstances traders do not take advantage of the volatility in the crude oil industry. At times, this is due to being unaware of the advantages of the pitfalls that are full of value. Other times, they have not learned about the outstanding qualities of the market. However, financial instruments in the energy sector are not made with the same baseline. Only a portion of the energy focused securities can give back profits.
The crude oil trading business requires a specific set of skills and tips. Some of the tips are.
•Understand how the crude oil market moves.
Supply and demand comes in play here. These perceptions are controlled by the worlds output, which is directly linked with global economic power. When there is more supply than demand, traders sell the oil at low prices. When the there is a flat curve or a high demand the bid for crude oil is always high.
When positive elements come together, they produce trends that are inclined upwards. An example, in mid-2008 there was inflation of crude oil price where the price was more than $140 per barrel. The opposite is also true, a tight convergence between negative element in 2015 around August had the price went as low as $37.75 per barrel. Through price action, the trading margins are controlled. Many times when crude oil reacts to different convergences, they can maintain that for a couple of years.
•Preference Between Brent and WTI Crude Oil
There are two crude oil markets. The Brent Crude and West Texas Intermediate Crude markets. The Brent Crude Market is mainly from the North Atlantic. The WTI is from the American Permian basin and a few local locations. The difference of these crude oil markets is the composition in levels of sulfur and the American Petroleum Institute gravity. Brent crude market is the mostly preferred in the world. However, a few year ago, the WTI market has been gaining great traction. In 2017 for example, the WTI was more internationally acclaimed and traded.
For many years, the two markets traded on a thin band. This changed at the beginning of the last decade when the demand and supply rapidly changed. In America there was the introduction of shale technology that increased the production of crude oil. There was also the fracking technology that made the WTI production rate grow while the drilling in Brent markets was declining. The American laws towards the Arabian oil market, which was dated back in the 70s, was a major reason for division. The laws banned American companies from selling oil overseas. The ban was lifted in 2015.
Shale companies in the United States operate in fields where the price of new wells cost around $35 on average per barrel. Companies that are involved in this business include Chevron Corp Devon energy group and EOG resources, which are some of the biggest investors in the business. They are planning on weighing and evaluating the spending cuts incurred. The research is mainly based on the drilling data that is shared by shale drilling companies in the United States.
For the last couple of year, shale companies have been trying to force the price of oil per barrel to be around 20 dollars by drilling and forcing suppliers to do so. During the coronavirus period, the oil market rate has left most shale gas drilling companies with the price being lower than the production costs.
Large industry players have started a price war that will most likely finish and bankrupt the shale companies that are now incurring absurd inflation in terms of cost of production. The reason there is a petroleum war between Saudi Arabia and Russia is what to do with the lower demand of oil. This is because most day to day activities like transport and the daily running of industries have been suspended by most governments during this coronavirus pandemic.
When they disagreed on the price percentage of cuts that they would take to reduce oil production, the parties did not dwell on the fact that the overall global market needs balance. Analysts have said that there are very few companies that drill oil that are going to remain profitable and able to balance and afford production costs. This will lead to a reduction of wholesale price in an industry that most companies are operating at an overall loss.
Most shale companies are already negotiating a 25% reduction in the price of the materials they need for production to take place. Others are looking at future ventures that will allow them to come up with hedges and way of locking future prices of output.
Investors are advised to make independent choices when choosing the markets to venture in. In addition, it is important to view the market trends and the market experts’ advice.
The energy markets are mainly surrounded by hedgers and professional traders. They speculate how the market is going to be short and long term. Unlike the precious metal markets, the retailers do not necessarily influence market trends. This is because it is the least sentimental market.
Most of the time, the headlines in the news direct how the small traders interact with the market. Most of the time they react if there is a sharp trend. In times of market momentum, greed can affect the beneficial trend to most players. There are very many collapsed momentum examples over the years because of greed and hoarding.
•Study long term trends and graphs.
After the Second World War, the price of crude oil was around $20 per barrel. This lasted up to the 70s when the inflation rate was high and it peaked to $120 per barrel. It continued to rise through the decade before it hit a dropping tangent. It dropped throughout although through a narrow band up to around the new millennium. Then, there was an upward trend from the new millennium up to over $150 per barrel 8 years later. It started another deteriorating trend up to 2017 when it sold at $20 dollars. This did not last, it peaked and by the end of 2017 it was at around $55. By Valentine’s Day 2020 it closed at $51.51.
If you need liquidity, the WTI offers over 10 million contracts a month and it would be attractive to invest here. The New York mercantile exchange WTI is listed as the most liquid listed contract. However, it still has higher risk. This is mainly because the least fluctuation price is limited to 1000 barrel and 0.01 per barrel contract. Price speculations are made here because there are many energy based products but the investors are not as many.
The American oil fund gives the best way to invest as equities, it boasts a minimum of 20 million shares per day. Long contracts mainly minimize the extension of prices because they raise differences. The front-month, a unique phenomenon, also has discrepancies making the WTI prediction to be jeopardized.
Sometimes, companies prefer to track diverse markets like oil service operations other than crude oil prices. This way, an opportunity to create market trends presents itself. This happens mainly because of the divergence and convergence of crude oil prices. Parallel swings occur here in times when equities are steep over a long time. The interdependence in market relationship is built from this.
In oil trading you have to know whether an option is selling more than it should or less. The stochastic RSI indicator is best equipped to determine this. Over the years it has been used to predict trading trends in commodity markets.
The price of the dollar directly affects the price of oil per barrel. When the dollar becomes stronger, the price of oil reduces. The direct opposite is also true. Monitoring the fluctuations in dollar price can help you when investing in oil.
Time frames. Choosing the best chart time frame.
WTI crude oil is mainly traded from Sunday 6pm to Friday 5: 15 pm. Those are the ideal times to do the trading for crude oil. It is important to note that in whichever form of trading, every minute is unique and you can study patterns to avoid losing money.
This unique charts shows fluctuations in prices during an active trading session. They show the important data positions from the time that the market opens till it closes. They show the single days movement in full details.
Let us assume that you need to track the index movements of a specific date, probably RBI policy. You can track the pattern from two weeks prior leading to the desired event. Most of the time, the time frame for an intraday chart is mainly one hour. A synonym is the hourly chart. With necessity you can track charts per second too, these are called tick charts.
The chart below displays a one hour chart of Nifty from the 17th of October 2004. The one day’s activity is displayed on the dotted vertical line.
2. Daily Chart
A day represents a complete cycle of events in our lives right from sunrise to sunset. We rise up every morning, do our chores during daytime and retire to bed at the night and the cycle repeats itself. We lead our daily lives in various parts and a day is the best representation of such parts.
The day chart represents the pattern from morning to evening. This is during the time human beings are doing their day to day activities like going to work and house chores. It is a repetitive cycle, the same as the market pattern monitoring. The day pattern is the most preferred way of looking at the trends.
Using the daily charts reduces anxiety in the trading process because it requires you to only look for one unique piece of information every day. This way you are able to make your decisions without any pressure, you make calculated decisions without worrying about the fluctuations every minute. Your decisions are not over analyzed and overtrading is avoided.
The most successful observers make their decisions based on the day to day trends. This is regardless of whether they are fundamental analysts, financial media observers or general investors.
The chart below shows a daily trend from the 14th of March 2004. This is a daily representation of the Nifty daily candlestick chart.
3. Weekly charts.
The weekly charts comprise of day to day data combined for a week. This means that the opening price would start on Monday and would close on Friday. The peak performance on the high or low side are going to be the high and low of the week when the stock closes.
In the chart below, weekly data is well shown and stipulated. You realize that you can see the drop in sensitivity compared to the daily chart. The price candles reduce compared to the daily and hourly charts. This is due to the fact that it is five days data compressed into data points into one week. This is mainly used when you are tracking the trends of the market rather than the sensitivity. The data represented starts from March 2014.
4. Monthly charts.
The concept for weekly charts is shared on the monthly charts. This means that the opening price at the beginning of the month is regarded as the opening level for the whole month. The final day’s closing price is considered as the closing level for that month.
If you have a long horizon as an investor, this should be your preferred chart. The longer your horizon the longer you can stretch your charts and study patterns quarterly, biannually or even annually.
The chart below shows Nifty monthly candlestick since March 2009.
•Day Trading Crude Oil Futures
Future day traders have a huge preference for crude oil. When you have properly anchored pivot points, the market reacts in favor of you. You can easily monitor and reduce high risk loses while attacking the up and down swings since the stop orders can be automatically made. This also works the same for other stock options other than crude oil trading.
•Perspective of oil pricing changing in times of corona virus.
Oil crush means that the price of oil has gone down to an extent that the price of oil per barrel cannot be imagined. The most shocking thing about this is the price of oil went down to negative figures and that is something that can barely happen. The demand of oil has reduced by more than 70% and this is because industries across the world have been closed down because of the coronavirus pandemic.
Demand has gone down from about 100 million barrels a day to less than 30 million barrels a day in the short period of time that coronavirus has been present in the world. With this in mind, one of the biggest producers of oil in the world has decided to reduce production of oil by only 9% thus leaving the market with a surplus.
Many countries are taking advantage of the situation and buying the oil for low prices and saving and storing it because the price of oil will definitely come back up when the situation stabilizes. As consumers, the effect on the price of oil is minimal. However, that is challenged because the demand from the clients is at an all-time low. This is mainly because there is basically no need for the amount of crude oil that could be purchased on a daily basis. As far as the production goes, countries that produce the bulk amount of oil from USA RUSSIA and Saudi Arabia are adjusting the productions process capacities to a lower figure. The OPEC has reduced the production by about 10%. This still leaves the market a little bit saturated still.
Demand is affected mainly by the needs of the consumer. In this case, the consumer pool that needs oil day to day has reduced drastically. This is because places of work have been closed and governments have enforced lockdowns and mandatory quarantines. As a result, the demand is very low because the need has dropped significantly.
For countries that can afford storing and purchasing oil in large quantities, they are doing so now because the price is at an all-time low and it would make sense for them when oil prices stabilize. These factors are mainly a representation of individual demand and the general market pool that consists of many industries, processing plants, manufacturers, and factories as well.
Supply curves are used to show how the quantity of oil supplied will fluctuate as the price goes up and down if other factors are to remain constant. In a case where the factors change then the supply changes will be seen in the curve. As a shift in supply happens, there will definitely be a change in the quantity supplied at any price. In an example where you run a restaurant and you use gas to cook for your patrons, if the price of oil goes down, the price of gas will also go down and that will reduce your cost of running the business.
These graphs above show how demand and supply are affected.
•Different oil firms and refinery services. Their roles.
There are many companies that are part of the oil sector. In order to trade effectively you have to differentiate them and their roles. Most of the time people tend to think of the mining and processing parts being the oil industry alone. Here we are going to discuss the different types of oil companies with their unique qualities.
The industry is divided into segments from upstream, midstream and downstream services. There are also support segments, which offer auxiliary support to the main segments.
The upstream companies deal with the discovery, exploration, and the very first stages of production of oil. Oil and gas are discovered at this stage. Petroleum mining is very technical and the firms that do this need to be well equipped. They also need to move with times as the technology is advancing at a rapid rate. Exploration starts in places that can hold the resource in large quantities over a long period of time. This makes the investment viable. Through polarization, a lot of geophysical and geo-chemical data analysis is conducted to establish long term value.
After estimation of the resource, its quality is determined and tested. This also goes a long way to show the value. When all this is established, the drilling of wells begins. Extraction happens here, the upstream companies are responsible to bring the crude oil to the surface as well as natural gas.
As this is the source of the raw materials, it is highly advisable to trade and invest in upstream companies.
The midstream companies tend to do the heavy lifting after the drilling. They process, package, store, and transport oil and other byproducts. The companies are also tasked with the marketing of their products to the market which include refined oil, crude oil, gas, and gas liquids. They are the end point of whole sale trade, the oil brokers interact a lot with the midstream companies. Most of the time, the companies are integrated to have a combination of upstream, midstream and downstream companies.
In the United States and Canada there are very many midstream companies compared to the rest of the world. This is because of the fact that most of these ventures are owned privately and are not controlled by the government.
The role of the downstream companies is to refine the crude oil into finished products. They refine the oil and gas into products such as gas, liquids, diesel and other energy sources. The simpler the end product is, the more the company is linked to being downstream. Downstream industries affect many industries by providing the raw energy material to them.
For example, in the agricultural industry, it is linked to pesticides and insecticides. Other times, the fuel needed to run agricultural machines at each level depends on downstream companies.
Companies like Shell and EXON have the integration of every stream from upstream to downstream. Most people know about the end product that is the cooking gas and fuel sold at petrol stations. Refiners prefer the cost of piping the oil to the intended location other than tankers. This reduces risk and loses that could be incurred in future.
All the levels are important in the trading and investment in the crude oil industry. For the service and refinery companies they gain profits when the upstream and downstream company’s rates reduce. Through high demand of crude oil, the service firms make most profit then. Refiners make their bulk of money if the petroleum products demand is high without affecting the price of crude oil. These markets and stages offer an argumentative opportunity for investors. It is important for new investors to do research on how and where they can invest and make profits. As said earlier study the patterns keenly.
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