Oil trading can be a lucrative venture, but it also comes with its share of complexities and risks.
If you’re new to the world of Commodity Trading and have been eyeing the oil market, you’ve come to the right place. Oil trading can be a lucrative venture, but it also comes with its share of complexities and risks. In this beginner’s guide, we’ll walk you through the best way to trade oil in 2023, offering strategies and tips to help you confidently navigate this exciting market.
Hey there, beginner traders! Let’s break down what happened with oil prices on Thursday.
If you’re new to the world of trading and have been eyeing the oil market, you’ve come to the right place. Oil trading can be a lucrative venture, but it also comes with its share of complexities and risks. In this beginner’s guide, we’ll walk you through the best way to trade oil in 2023, offering strategies and tips to help you navigate this exciting market with confidence.
Commodity Trading – State of oil markets
Oil prices are on a market seesaw; On one hand, some folks were worried about not having enough oil. On the other hand, there’s a belief that Western countries might keep their interest rates high to fight inflation. For central banks, it’s a balancing act between those two factors.
On October 28, Brent crude futures went down by 37 cents to $96.18 a barrel. But before that, they had gone up, reaching the highest price we’ve seen since November 2022.
Then there’s the December Brent contract – It was down 35 cents at $94.01 per barrel. Not too far off, right?
Now, let’s talk about US West Texas Intermediate crude futures (WTI for short). It dropped by 24 cents to $93.44 per barrel. But earlier in the day, traders were feeling pretty confident and went above $95 for the first time since way back in August 2022.
The reason behind all these price moves? Well, experts are saying it’s because there’s not a ton of oil available, and the amount of oil in storage is going down.
But here’s the twist – as Brent prices get closer to hitting $100 a barrel, there’s a worry that central bankers might have to keep interest rates high. That’s because high oil prices can make everything more expensive, and that’s not great for the economy.
On the topic of oil, earlier in September, the U.S. saw its crude oil stocks drop by 2.2 million barrels to 416.3 million barrels. That’s way more than the 320,000-barrel drop analysts were expecting.
And speaking of barrels, at the Cushing, Oklahoma storage hub (where they deliver US crude futures), the stockpile went down by a whopping 943,000 barrels in one week. It’s now at its lowest point since July 2022. People are wondering if we’re running out of room for oil there.
All of this is happening because Saudi Arabia and Russia, who are part of a group called OPEC+, decided to cut their oil production by 1.3 million barrels a day until the end of the year.
Now, Russia has a ban on exporting fuel, and they’re not planning to lift it anytime soon. They want things to settle down in their own market first.
And as for Russia talking to OPEC+ about sending more crude oil to make up for the fuel export ban, it doesn’t seem like that conversation has happened yet.
Commodity Trading – Future contracts
So, here’s the deal: The difference between the price of the first and second month’s contracts for Brent crude, which is like a superstar in the oil world, has gotten bigger. This is a sign that something interesting is going on with the oil supply.
And guess what? It’s all because of these voluntary cuts made by OPEC+ (that’s a group of oil-producing countries).
Brent crude is a big deal because it’s used to set the price for a lot of the world’s oil trading. Since late June, the price of Brent has been going up, and the reason behind it is that Saudi Arabia, one of the biggest oil producers, decided to cut back on how much oil it’s producing.
Now, the gap between the price of the first month’s Brent contract and the second month’s contract has gone up to $2.45 per barrel. That’s the highest it’s been since October 2022. This fancy term “backwardation” basically means that there’s not a ton of oil available right away, so the price for getting it quickly is higher.
OPEC+ has been cutting back on how much oil they produce, and that’s a big reason why oil prices have gone up. Russia and Saudi Arabia alone are cutting 1.3 million barrels of oil per day until the end of the year.
Now, here’s a little twist: The Brent spread (that’s the difference in prices) has been kind of steady lately. One reason could be that they added some U.S. WTI Midland oil to the mix of oils that make up Brent. That added more supply to the mix.
The amount of WTI Midland oil coming to Europe in September is going to be much lower than before. That’s why some folks think the Brent spread went up. Less oil coming in means the price for quick delivery goes up.
Commodity Trading – Stock markets taking a hit
Let’s break down what’s happening in the world of US stock futures on Sep 28.
US stock index futures took a little dip on Thursday. Why? Well, it all comes down to those skyrocketing oil prices. When oil prices go up, it can make the people in charge of interest rates think they need to keep rates high for a longer time. And that’s not always great for the stock market. We’re also waiting for some important economic data and for the big boss of the Federal Reserve, Jerome Powell, to say some things later in the day.
Commodity Trading – Inflation continues to hit markets
As oil prices keep climbing, it’s making inflation (that’s when things get more expensive) stick around longer than expected. And this is making everyone worry that interest rates will stay high.
Now, in the stock market, the energy sector is doing pretty well because of those high oil prices. But on the flip side, sectors like technology and real estate are feeling the pinch because they don’t like it when interest rates go up.
Big tech companies like Apple, Microsoft, Amazon, and Tesla are seeing their stock prices drop a bit, between 0.3% and 0.8%.
Dow futures were down by 68 points (0.2%), the S&P 500 futures were down by 8.5 points (0.2%), and the Nasdaq 100 futures were down by 47.5 points (0.32%).
Here’s the thing: The S&P 500 and the Nasdaq are having a tough month, and it’s mostly because the interest rates on things like government bonds are going up. This is the first time this year that these indexes are having a not-so-great month, and it’s the first time in 2023 that they might end the quarter with a decline.
Now, let’s talk about what traders are thinking. They’re mostly betting that interest rates won’t change in November and December, around 77% and 58%, respectively. But, they’re starting to think there might be a rate cut of 25 basis points in March, and that chance goes up to over 31% in June and July.
This basically means they’re guessing about what might happen with interest rates in the future.
Keep an eye out for two important things: First, the final estimate of how well the U.S. economy is doing (that’s the gross domestic product or GDP), and also, the number of people filing for unemployment benefits. These numbers will tell us a lot about how the country is doing.
And don’t forget to listen to what Jerome Powell has to say later on Sep 28. Plus, we’ll be hearing from some other important folks from the Federal Reserve too.
Understanding the Oil Market
Before you start trading, it’s crucial to grasp the basics of the oil market:
Types of Oil: The two primary types of crude oil you’ll encounter in the market are West Texas Intermediate (WTI) and Brent Crude. WTI is traded in the United States, while Brent Crude is the international benchmark. Prices may vary slightly between the two, so keep an eye on both.
Factors Influencing Oil Prices: Oil prices are influenced by various factors, including supply and demand, geopolitical events, economic indicators, and production cuts from organizations like OPEC (Organization of the Petroleum Exporting Countries).
Trading Hours: The oil market operates 24/5, meaning it’s open 24 hours a day, five days a week. This provides ample opportunities for trading but also requires careful timing.
Commodity Trading – Strategies for Trading Oil
Now, let’s explore some strategies to help you trade oil effectively in 2023:
Stay Informed: Stay updated on global events, economic data releases, and geopolitical developments that can impact oil prices. For instance, unrest in oil-producing regions can lead to supply disruptions, causing prices to spike.
Technical Analysis: Use technical indicators and chart patterns to make informed decisions. Common indicators include Moving Averages, Relative Strength Index (RSI), and MACD (Moving Average Convergence Divergence).
Fundamental Analysis: Understand the fundamentals of oil, such as supply and demand dynamics. Pay attention to inventory reports, OPEC announcements, and global economic trends that can influence prices.
Risk Management: Always have a risk management strategy in place. Set stop-loss orders to limit potential losses and stick to your trading plan. Never invest more than you can afford to lose.
Diversify Your Portfolio: Don’t put all your eggs in one basket. Diversify your investments to spread risk across different assets. This can help protect your capital during volatile periods.
Demo Trading: Consider starting with a demo trading account to practice without risking real money. This allows you to get comfortable with the trading platform and test your strategies.
Commodity Trading – Tips for Success
Here are some additional tips to help you succeed in oil trading:
Choose a Reputable Broker: Select a reliable broker with a user-friendly trading platform, competitive spreads, and good customer support. Research and read reviews to find the right one for you.
Start Small: Begin with a small investment and gradually increase your exposure as you gain experience and confidence.
Keep Emotions in Check: Emotions like fear and greed can lead to impulsive decisions. Stick to your trading plan and avoid making snap judgments based on emotions.
Continuous Learning: The world of trading is always evolving. Keep learning and adapting to new strategies, technologies, and market conditions.
Practice Patience: Trading can be both exciting and nerve-wracking. Be patient and avoid chasing quick profits. Slow and steady wins the race.
Trading oil in 2023 offers exciting opportunities for beginners, but it’s essential to approach it with knowledge and caution. By understanding the oil market, employing effective strategies, and following sound trading principles, you can embark on your oil trading journey with confidence.
Remember that success in trading takes time and practice, so be patient, stay informed, and never stop learning.