Commodity trading – The price of oil is influenced by a complex interplay of factors, both supply-side and demand-side, as well as geopolitical and economic considerations.
Oil prices are hitting yearly highs in September 2023. In this article, we find out what’s happening with the price of oil and share valuable advice for anyone wanting to enter the world of Commodity trading.
Commodity trading – Hitting yearly highs
On Monday (Sep 19), oil prices flirted with the $95 per barrel mark during the trading session. This happened because folks were feeling jittery about a potential shortage in the oil supply. Why? Well, Saudi Arabia and Russia extended their production cuts, and shale production in the US isn’t exactly rocking the charts. But hey, at least nobody’s too worried about demand right now.
The world’s go-to oil benchmark, Brent crude futures, finally settled at $94.43 a barrel, riding a 50-cent wave up from its low of $94.45. Meanwhile, the US West Texas Intermediate crude futures climbed by 71 cents to reach $91.48.
Earlier in September, Saudi Arabia and Russia were like, “Let’s keep cutting our oil output by a combined 1.3 million barrels per day (bpd) until the end of the year.”
And here’s the scoop on US shale oil: It’s expected to take a third consecutive month of hits in October, hitting the lowest point since May 2023, according to the US Energy Information Administration’s monthly report.
Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, had some things to say on Monday. He defended the OPEC+ cuts to oil supply, saying that global energy markets need a gentle touch of regulation to keep the wild swings at bay. He also threw in some words of caution about Chinese demand, European growth, and what central banks are doing to combat inflation.
Brent and WTI have been on a roll for three weeks in a row now, reaching their highest levels since last November. They’re even on track for their biggest quarterly gains since Russia’s invasion of Ukraine back in early 2022.
Just a heads-up, though: Brent has been chilling in the “overbought” territory for seven sessions straight, and WTI has been doing the same for five sessions.
Some folks in the market decided it was time to cash in on their gains. Dennis Kissler, the senior vice president of trading at BOK Financial, mentioned profit-taking.
Citigroup (Citi) decided to join the prediction party on Monday, saying that Brent prices might party on past $100 a barrel this year. Chevron’s Chief Executive, Mike Wirth, echoed that sentiment in an interview with Bloomberg News. He thinks oil is in the mood to cross the $100-per-barrel threshold.
Now, back to Saudi Arabia and Russia and their output cuts. They could leave markets with a 2 million bpd deficit in the fourth quarter. If that happens and our oil reserves start disappearing, we might be looking at even higher prices in 2024.
China’s a bit of a wildcard in this oil game due to its slow post-pandemic economic recovery. But don’t let that fool you—Chinese oil imports are still going strong.
Commodity trading – What’s next for oil?
And here’s a fun fact: A series of stimulus measures and a surge in summer travel gave a boost to industrial output and consumer spending last month. Chinese refineries decided to roll up their sleeves and get to work, thanks to some juicy export margins.
This week, keep an eye on those central banks, especially the US Federal Reserve, as they make their interest rate decisions. Over in the UK, the Bank of England might just raise interest rates again. It could be their last hoorah in one of the most intense tightening cycles we’ve seen in the past century. Why? Because the economy is making policymakers very nervous.
Commodity trading – A guide to trading oil
History of Oil
Oil has been a vital commodity for centuries, with its value soaring during the Industrial Revolution when it became a primary source of energy for machines and vehicles. The modern oil market as we know it began in the early 20th century with the discovery of large oil reserves in the Middle East, leading to the formation of major oil companies. Today, oil remains a key global commodity, powering economies and industries worldwide.
Pros and Cons of Trading Oil
Liquidity: The oil market is highly liquid, making it easy to buy and sell positions.
Diversification: Oil can be a valuable addition to an investment portfolio, offering diversification benefits.
Hedging: Oil can be used to hedge against inflation and currency fluctuations.
Global Influence: Oil prices are influenced by global events, providing numerous trading opportunities.
Price Volatility: Oil prices can be highly volatile, leading to significant gains or losses.
Risk of Overexposure: Concentrating too much on oil in your portfolio can expose you to risks related to its price fluctuations.
Geopolitical Factors: Political conflicts in major oil-producing regions can disrupt supplies and affect prices.
Environmental Concerns: Ethical investors may avoid oil due to environmental and sustainability concerns.
The price of oil is influenced by a complex interplay of factors, both supply-side and demand-side, as well as geopolitical and economic considerations.
Here are 10 key factors that can affect the price of oil:
Supply and Demand: The fundamental law of supply and demand plays a significant role. When demand for oil outpaces supply, prices tend to rise, and when supply exceeds demand, prices may fall.
Geopolitical Events: Political instability or conflicts in major oil-producing regions, such as the Middle East, can disrupt oil supplies and cause prices to spike.
OPEC and Non-OPEC Decisions: The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries’ decisions on production quotas can impact oil prices. Production cuts or increases can influence global supply.
Global Economic Conditions: Economic growth and recession can affect oil demand. A strong global economy typically leads to higher oil consumption, while economic downturns can reduce demand.
Currency Exchange Rates: Oil is priced in U.S. dollars (USD). Exchange rate fluctuations can affect the purchasing power of oil-importing countries, influencing demand and prices.
Innovation and Technology: Advancements in energy-efficient technologies and alternative energy sources can reduce oil demand, putting downward pressure on prices.
Natural Disasters: Hurricanes, earthquakes, and other natural disasters can disrupt oil production, refining, and transportation infrastructure, leading to supply shortages and price spikes.
Speculation: Speculative trading in oil futures markets can cause price volatility. Traders and investors often react to news and market sentiment, amplifying price movements.
Government Policies: Environmental regulations, taxes, and subsidies can impact both oil supply and demand. Government decisions on drilling permits, for example, can affect production.
Oil Inventories: Levels of crude oil and petroleum product inventories in major consuming regions like the United States can influence short-term price movements. Low inventories may indicate supply constraints.
These factors can interact and change over time, creating a dynamic and often volatile oil market. Traders, investors, and policymakers closely monitor these factors to make informed decisions and assess the potential impact on oil prices.
Commodity trading –Top Ways to Trade Oil
Futures Contracts: Futures contracts are agreements to buy or sell oil at a specified price on a future date. They provide leverage but come with high risk due to potential price swings.
Options Contracts: Options give you the right (but not the obligation) to buy or sell oil at a predetermined price. This strategy provides flexibility and limits potential losses.
Exchange-Traded Funds (ETFs): Oil ETFs track the price of crude oil or oil-related indexes. They offer diversification and can be traded like stocks.
Stocks of Oil Companies: Invest in shares of oil companies, which can provide exposure to the oil market and potentially offer dividends.
Commodity CFDs (Contracts for Difference): CFDs allow you to speculate on the price movement of oil without owning the underlying asset. They offer leverage but also magnify losses.
Commodity Trading – Practical Example of Trading Oil
Let’s say you want to trade oil using a futures contract. Here’s a simplified example:
You believe that geopolitical tensions in a major oil-producing region will disrupt supply, causing oil prices to rise.
Choose a Broker:
Select a reputable broker that offers oil futures trading.
Opening a Position:
You decide to buy one crude oil futures contract at the current price of $70 per barrel. Each contract represents 1,000 barrels of oil, so the total contract value is $70,000.
Margin and Leverage:
Your broker may require an initial margin of, say, 10% of the contract value ($7,000) to open the position, providing leverage on your investment.
Monitoring the Trade:
As geopolitical tensions escalate, oil prices increase. The current price rises to $75 per barrel.
Closing the Position:
You decide to close your position to lock in profits. Selling your contract at $75 per barrel, you earn a profit of $5 per barrel.
With one contract, your profit is $5 x 1,000 barrels = $5,000.
Commodity trading – Risk Management:
Remember that futures trading carries risks. Set stop-loss orders to limit potential losses and use proper risk management techniques.
It’s crucial to conduct thorough research, stay informed about market news, and consider your risk tolerance before trading oil or through any other commodity trading. Always use risk management tools to protect your capital.
Please note that this example simplifies the trading process and doesn’t consider factors like transaction costs, taxes, or overnight financing charges, which can affect your actual profits and losses. Trading oil involves substantial risk and is not suitable for all investors. Make sure to consult with a financial advisor and thoroughly understand the risks before trading commodities.
Commodity trading – Why trade with CMTrading?
- Awards and Recognitions:
CM Trading has received several awards and recognitions in the industry, which can be seen as a positive sign of its reputation. Awards may include acknowledgments for customer service, platform features, and educational resources. However, it’s important to keep in mind that awards are just one factor to consider when evaluating a broker.
Ensure that the broker you choose is regulated by a reputable financial authority. Regulatory bodies help ensure the broker complies with industry standards and safeguards client funds. CM Trading is regulated by the Financial Sector Conduct Authority (FSCA) in South Africa.
- Account Types and Fees:
Review the account types offered by CM Trading and their associated fees, spreads, and commissions. Ensure that the broker’s fee structure aligns with your trading preferences and financial goals.
- Trading Platforms:
CM Trading provides access to trading platforms such as MetaTrader 4 (MT4). Check if these platforms are compatible with your trading style and if they offer the tools and features you need.
- Customer Support and Education:
Evaluate the broker’s customer support services and educational resources. A reputable broker should offer responsive customer support and educational materials to help traders improve their skills.
- Reviews and Reputation:
Search for reviews and testimonials from other traders who have used CM Trading. This can provide insights into the broker’s performance and customer satisfaction.
Tips for Avoiding Scam Brokers Online:
To avoid falling victim to fraudulent brokers online, consider the following tips:
- Regulatory Compliance:
Verify that the broker is regulated by a recognized financial authority in its home country. Regulatory information should be readily available on the broker’s website.
- Research and Reviews:
Conduct thorough research by reading reviews and seeking feedback from other traders. Look for both positive and negative experiences.
Ensure the broker provides clear and transparent information about its services, fees, and trading conditions. Be cautious of brokers with vague or inconsistent information.
- Secure Website:
Check for a secure website with an “https” URL and a padlock icon in the address bar. This indicates that the broker takes security seriously.
- Customer Support:
Test the responsiveness of the broker’s customer support team by asking questions or seeking assistance before opening an account.
- Avoid Unrealistic Promises:
Be wary of brokers promising guaranteed profits or using high-pressure sales tactics. No legitimate broker can guarantee profits.
- Withdrawal Process:
Understand the broker’s withdrawal process and ensure it is straightforward and reliable. Scam brokers may make it difficult for traders to withdraw funds.