Being one of the most liquid investment commodities in the market, crude oil is a tradable commodity with clear charts. Just like any other investment commodity, traders need to know and understand the factors that have an influence on the price of crude oil i.e. market supply and demand. In addition to the supply and demand factors, it is crucial for oil traders to conduct a fundamental as well as technical analysis to stay updated with the current oil market trends and make better investment decisions. What else? Traders should also invest their time and efforts in crafting and following the right crude oil trading strategies. If you are looking for strategies and tips for oil trading, you have come to the right place! This post is all about crude oil investment tactics and tips on how an individual can get an edge over the market. Let’s get started.
The Benefits of Trading Crude Oil
Crude oil is the primary source of energy. It can be used to create an array of products including but not limited to petrol, lubricants, wax, diesel, and so on. The liquidity and high crude oil demand are the main reasons why this commodity is traded in a high volume. Brent contributes to the world’s two-thirds of the total oil traded every year following WTI.
The Factors that Influence Price Movements of Crude Oil
It isn’t rocket science to know that supply and demand are the two major factors that have a great impact on oil trading. No matter what investment commodity is traded, its price can be determined by looking into its supply and demand in the current marketplace. Now the question is “How supply and demands are calculated”? Well, these factors keep on changing with time, weather, and other conditions. Let’s discuss the factor that affects supply and demand for crude oil:
Supply and Demand Factors
- Seasonality – The best part about crude oil is its demand is high in both the winter and summer seasons. While the increased activities in summer can ramp up the demand for crude oil, the cold winters encourage people to use oil in order to heat their homes.
- Oil Consumers – Usually, the largest consumers of crude oil are the developed territories such as European states and the United States. But in the current times, a major portion of the demand for oil generates from the developing nations (Asian countries) such as China and Japan. The economic performance of these countries extensively affects crude oil demand. Therefore, it is important for traders to be vigilant about crude oil demand in the European and Asian territories.
- Oil Suppliers – Just like the demand, it is important to know the current production and supply of oil. The production limitations and extensions alter the crude oil prices in the global market. For instance, the announcement for crude oil supply curb by the Cartel in 2016 led to a sudden increase in the oil prices from $44/bbl to $80/bbl.
The professional oil crude traders follow a fundamental oil trading strategy after taking into account the supply and demand for the commodity in global markets. It is worth noting that the trading strategy of investors may vary to a great extent. But risk management is one of the most crucial factors that every trader should consider before finalizing a decision. The accurate crude oil strategy is based on three factors i.e.
- Fundamental Analysis
- Technical Analysis
- And risk management
As soon as you comprehend the fundamental factors of supply and demand for crude oil, the next step is to study the technical analysis. Technical analysis helps you get the signals for entering into the crude oil trading market. Once the buy and sell indications are identified, it is time for traders to follow risk management strategies. Let’s demonstrate this with an example:
In 2017, Russia and OPEC announced a crude oil production cut, which led to a decrease in the supply of oil across the global oil markets. This is what we call the fundamental strategy that the traders must add to their oil strategy to determine the buy and sell signal. The next step is to look into the chart with the help of technical analysis. Fortunately, there are a plethora of technical indicators as well as price patterns that can be used to ascertain the right signals for entering the trading market. One of the famous indicators is the Relative Strength Index (RSI). Coming to the last step, the traders must manage the risk by avoiding trading mistakes. It can be done by setting take profits and stopping losses.
These were some important strategies the traders must take into consideration before entering the oil trading market. So why wait? Use fundamental and technical indicators and ensure a successful crude oil investment decision.