Crude oil typically has some of the best volatility of all classic trading instruments, offering traders fantastic opportunities and rewards.
However, volatility is a double-edged sword and there is plenty of risk when trading the commodity known by man as “black gold”. In this article, we take a look at the top 5 tips for trading crude oil to make sure you stay on the right side of the flood!
1 – Get to know OPEC
The Organization of the Petroleum Exporting Countries is a 14-nation intergovernmental group founded in the 60s. It works together to “coordinate and unify petroleum policies” and “ensure the stabilisation of oil markets”. The group is comprised of Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Republic of Congo, the United Arab Emirates, Venezuela and the group’s largest producer and de-facto leader, Saudi Arabia.
As part of its mission, OPEC regularly meets to agree on production levels. This is where its biggest market impact is seen. Put simply, if OPEC is attempting to curb production among its members, limiting supply, this typically forces prices higher. Similarly, if OPEC is trying to boost production among its members, increasing supply, this typically pushes prices down.
2 – EIA Reporting
The Energy Information Administration is responsible for reporting on the level of US crude inventories. This includes details such as import, export and production levels, on a weekly basis. The EIA is an independent, impartial organisation and requires all oil producers to submit data each week.
As such, this report is watched very closely by oil traders and can have a big impact on price action each Wednesday when it is released. In simple terms, if US crude inventories are rising, this means that supply is outweighing demand and price will typically fall in response to the report. Similarly, if inventories are falling this means that demand is outstripping supply and will typically drive prices higher.
Production is also key in the report. Higher production levels typically lead to lower prices due to the increased supply. In the US, we have recently seen crude production levels hit all time highs of 12.2 million barrels per day.
3 – API Reporting
The American Petroleum Institute is an industry organisation which represents US companies involved in oil production and distribution. Each week it reports on inventory levels, similar to the EIA report. However, unlike the EIA report, the API data is collected at will and typically sample data covers around 80% – 90% of total refinery products.
While the data can still be market moving, it is typically used as an estimate for gauging the EIA report which comes out the day after. For example, if the API report says that inventories have risen, traders will be anticipating a rise in the EIA report.
4 – Keep an Eye on China
As the world’s second largest consumer of oil, behind the USA, the health of the US economy can have a big impact on oil prices. During times of strong economic performance in China, oil prices tend to rise as traders anticipate strong demand there.
Similarly, periods of reduced activity in China can tend to weigh on oil prices as traders anticipate a reduction in demand. Over the final part of last year, as trade war concerns ballooned and Chinese data was regularly undershooting expectations, we saw a large drop in oil as traders scaled back their demand expectations. As such, with expectations of a trade deal now growing, demand expectations are creeping back into the market, lifting oil prices.
5 – Middle East & Geo-Political Factors
One of the more unpredictable aspects of oil trading is the strong impact that geo-political factors can have on prices. In the Middle East, where the majority of the world’s oil is produced, any fresh outbreaks of violence or news of military operations cause sharp, sudden spikes in oil as traders anticipate reduced supply.
Similarly, actions such as US sanctions on countries like Iran or Venezuela, restricting foreign buyers from purchasing their oil, can also causes spikes in oil prices. Furthermore, natural disasters can play a part in restricting oil production and distribution.
Therefore, oil traders need to make sure they are always keeping track of the headlines!
