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Five things to know before you trade Crude oil

Crude Oil drilling

Crude oil, as a commodity is one of the volatile instruments. When you get your trades right, you can make quite some big profits. Due to the volatility in the oil markets, there are ample opportunities for traders.

Crude oil is also known as fossil fuel, because the oil is derived from fossils buried deep under the earth.

Oil is often called the Black gold. It is one of the most important commodities that powers global economies. Therefore, one can get a pretty good understanding of the economy based on the oil markets.

Due to the fact that some of the largest oil producers are based in the Middle East, geo-political tensions also play a major role.

With crude oil, it is not just supply and demand but a host of other factors that one should consider. Technical analysis or a trading strategy might work, but without knowing the full picture, you would be trading in the blind.

Here are five things you should know when you trade crude oil.


1. WTI and Brent – The two main versions of oil

You can trade crude oil in various forms. From WTI crude oil CFD to crude oil futures and options as well. The most common way to trade crude oil is the CFD’s.

There are two main versions of crude oil.

  • The West Texas Instrument (WTI)
  • Brent crude oil

There isn’t much of a difference between the two. WTI crude oil is said to be a better grade compared to Brent, which finds it uses mostly in diesel fuels. An important differentiating factor is that WTI crude oil is primarily extracted in the United States.

All other types of fuels tend fall into the Brent category. The price between Brent and WTI also differs slightly. The difference in pricing is because WTI is much cheaper comparing to Brent.


2. Production or supply

When it comes to production or the supply side, it pays to understand the largest oil producers. Saudi Arabia is no doubt the world’s leading oil producer. The United States comes in at a close second, followed by Russia.

China and Iran make up the bottom end of the world’s top five oil producing nations. When there are disruptions, either technical or geo-political, it pays to keep an eye on the developments.

Crude oil can react quite quickly to the news.


3. Demand – The world economy

Demand for crude oil (at least for now) goes hand in hand with the global economy. When the global economy is steadily rising, the demand for oil also increases. Likewise, when the economy sputters, the demand is also lower.

In recent times, crude oil has been trending lower. One of the reasons for this is the lower expected demand. Authorities such as the U.S. Energy Information Administration (EIA) or the International Energy Agency (IEA) and the OPEC often give out forecasts for crude oil.

This can be a good indicator for what to expect from oil prices in terms of the price trends.


4. OPEC

The Organization of the Petroleum Exporting Countries was founded in the 1960’s. It is comprised of various oil producing nations. Most of the countries are based in the Middle east. Some of the OPEC members include countries in Latin America.

More recently, OPEC+ has become a term that includes Russia as well.

While OPEC did manage to have a sway in oil prices at one point, its influence has been diminishing. However, even in the current day and age, OPEC still has some influence. The most famous was the bear market in crude oil when OPEC started to flood the oil markets.

The OPEC meets twice a year and decides on production quotas. Such events can also be a precursor to the price trends in crude oil.


5. Geo Politics

When it comes to crude oil, geo politics goes hand in hand. Mostly, the skirmishes in the Middle East tend to have an impact on crude oil. Although such events do not tend to shift the trend, they can create short term ripples in the oil markets.

You can expect to see oil prices spiking on any surprising news from the Middle East.

Therefore, traders need to also keep an eye out for any news that could upset the balance in the oil markets.

Read 723 times Last modified on Monday, 21 October 2019 05:45

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