How To Make Money Trading Crude Oil – Crude oil trading offers great opportunities for profit in almost all market conditions due to its unique position in the world’s economic and political systems. In addition, volatility in the energy sector has increased sharply in recent years, ensuring strong trends that can generate consistent returns for short-term swing and long-term strategies.
Market participants often fail to take full advantage of crude oil swings, either because they have not learned the unique characteristics of these markets or because they are unaware of the hidden dangers that can contribute to -reversion. Furthermore, not all energy-focused financial instruments are created equal, and a subset of these securities are more likely to produce positive results.
How To Make Money Trading Crude Oil
Crude oil moves through perceptions of supply and demand, which are influenced by global production as well as global economic prosperity. Excess supply and falling demand prompt traders to sell crude oil markets, while increasing demand and flat or declining production prompt traders to offer more for crude oil.
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A tight convergence of positive elements can provide a strong advance, such as the rise in crude oil to $145.31 per barrel. barrel. Price action tends to build tight trading ranges when crude reacts to mixed conditions, with sideways action often continuing for years at a time.
Professional traders and hedgers dominate the energy futures markets, with industry players taking positions to offset physical exposure, while hedge funds speculate on the long and short term. Retail traders and investors have less influence than in more emotional markets such as precious metals or high-beta growth stocks.
Retail’s influence increases when crude oil trends suddenly develop and attract capital from small players who are attracted to these markets by front-page news and the British pound. The resulting waves of greed and fear can intensify the momentum of underlying trends and contribute to historic highs and lows that print unusually high volume.
Crude oil is traded through two primary markets, West Texas Intermediate Crude and Brent Crude. WTI comes from the US Permian Basin and other local sources, while Brent comes from more than a dozen fields in the North Atlantic. These types have different sulfur content and API gravity, with lower levels commonly known as light sweet crude. Brent has become a better indicator of world prices in recent years, although in 2017 WTI traded stronger on world futures markets (after two years of leading Brent volume).
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Prices between these ranges remained within a narrow range for years, but this ended in 2010 when the two markets suddenly diverged due to a rapidly changing supply and demand environment. The rise in US oil production, fueled by shale and fracking technology, boosted WTI output, while there was a rapid decline in Brent drilling.
US law, dating back to the Arab oil embargo of the 1970s, exacerbated this division and prohibited local oil companies from selling their inventories in foreign markets. This ban was lifted in 2015.
Many CME Group New York Mercantile Exchange (NYMEX) futures contracts track the WTI benchmark, with the “CL” ticker attracting significant daily volume. Most futures traders can focus entirely on this contract and its many derivatives.
WTI crude rose after World War II, peaking in the high $20s and entering a narrow range until the 1970 embargo sparked a parabolic rally to $120. It peaked at the end of the decade and began an agonizing decline, which fell into the pre-teens of the new millennium. Crude oil saw another rally in 1999, rising to an all-time high of $157.73 in June 2008. It then fell into a massive trading range between that level and a high of $20, falling around $55 at the end of 2017. In January 2021, it was trading at around $47.
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The NYMEX WTI Light Crude Oil (CL) futures contract trades over 10 million contracts per month, offering great liquidity. However, it has a relatively high risk due to the contract unit of 1,000 barrels and the minimum price deviation of 0.01 per barrel. There are dozens of other energy-based products offered through the NYMEX, with the vast majority attracting professional speculators but few traders or retail investors.
The US Oil Fund offers the most popular way to play crude oil via stocks, posting an average daily volume of more than 20 million shares. This security tracks WTI futures but is vulnerable to contango due to mismatches between the forward month and long-term contracts that reduce the size of price expansions.
Oil companies and sector funds offer different exposure to an industry where production, exploration and oil service activities present different trends and opportunities. Although most companies follow the general trends of crude oil, they can fluctuate wildly over long periods of time. These reversals often occur when stock markets are moving quickly, with rallies or selloffs triggering cross-market correlations that promote lock-step behavior between different sectors.
Reserves offer a great way to gain long-term exposure to crude oil, with many nations’ economies heavily leveraged on their energy resources. The US dollar against the Colombian and Mexican pesos, under the USD/COP and USD/MXN dockers, has tracked crude oil for years, giving speculators very fluid and easy access to up and down trends. Bearish crude positions require buying these crosses, while bullish positions require selling them short.
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Trading the crude oil and energy markets requires extraordinary skills to build consistent profits. Market participants looking to trade crude oil futures and its many derivatives must learn what moves the commodity, the nature of the common quantity, long-term price history and physical variations between different grades.
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By clicking “Accept all cookies”, you agree to store cookies on your device to improve website navigation, analyze website usage and assist with our marketing efforts. Oil still plays an important role in the global economy despite ongoing efforts to reduce its use and find alternative green energy sources. In the early days, finding oil under a drill was considered a bit of a nuisance, as the intended treasures were usually water or salt. It was not until 1847 that the first commercial oil well was drilled on the Absheron Peninsula in Azerbaijan. The American oil industry was born 12 years later, in 1859, with deliberate drilling near Titusville, Pennsylvania. (Drilling started in the US in the early 19th century, but they were drilling for brine, so any oil finds were accidental).
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Although much of the early demand for oil was for kerosene and oil lamps, it was not until 1901 that the first commercial well capable of mass production was drilled at a place called Spindletop in southeast Texas. This site produced over 100,000 barrels of oil in one day, more than all other oil-producing wells in the United States combined. Many argue that the modern era of oil was born on that day in 1901, when oil was soon to replace coal as the world’s main fuel source.
The use of oil in fuel remains a key factor in making it a commodity in high demand around the world, but how are prices determined?
With oil’s status as a global commodity in high demand comes the possibility that large price swings can have a significant economic impact. The two main factors that influence the price of oil are:
The concept of supply and demand is quite simple. When demand increases (or supply decreases), the price must increase. When demand decreases (or supply increases), the price should decrease. Does it sound simple?
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Not quite. The price of oil as we know it is currently fixed in the oil futures market. An oil futures contract is a binding agreement that gives the right to buy a barrel of oil at a predetermined price on a predetermined date in the future. Under a futures contract, the buyer and seller are obligated to fulfill their side of the transaction on the specified date.
In the spring of 2020, oil prices fell amid the economic slowdown. OPEC and its allies have agreed to historic production cuts to stabilize prices, but they have fallen to a 20-year low.
An example of a hedge would be an airline that buys oil futures to hedge against rising prices. An example of a speculator would be someone who only guesses the direction of the price and has no intention of actually buying the product. According to the Chicago Mercantile Exchange (CME), the majority of futures trading is done by speculators, where the buyer of a futures contract takes ownership of the commodity, less than 3%.
The other important factor in determining oil prices is
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