An Introduction to Oil Trading

Written by Mike

Topics: Forex trading, Investing

Where does the oil come from?

Did you know that there are 86 million crude oil barrels per day (BPD) produced? But who produces it?

39% of it comes from the Organization of the Petroleum Exporting Countries (OPEC), which is an intergovernmental organization based in Vienna and comprised of 12 oil producing countries (Algeria, Angola, Ecuador, Iran Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the U.A.E and Venezuela. Within OPEC, Saudi Arabia is a “swing producer” – this means that they reduce or increase their level of BPD production in order to stabilize prices.

15% of supply comes from FSU countries and the remaining 46% comes from non-OPEC sources such as the USA, UK and non-FSU Europe.
The Strategic Petroleum Reserve is the name of the United States’ emergency oil reserve. At a total of 570 million barrels of crude oil store in underground salt caverns along the Gulf of Mexico, this is the largest emergency petroleum supply in the world.

How do I trade in oil?

Oil must be traded in via two available “contracts.” Sunbird is a very popular trading broker for this.

1) Brent Crude: This is the UK contract for North Sea sourced oil. It is important as 2/3 of the world’s oil is priced relative to the UK Brent Crude index. It is traded in the London Stock Exchange as monthly “Futures contracts,” priced in USD.

2) West Texas Intermediate: This is the US Crude Oil contract. It’s often referred to as the “US Light Sweet Crude,” and also gets traded in monthly contracts.

Price affecting factors to watch when oil trading

1) US Driving Season: This is peak time in the US for petroleum consumption through the use of cars. This starts on Memorial Day (end of May) and ends on Labor Day (beginning of September);

2) U.S. Hurricane Season: During hurricane season, oil prices always rises. The official period for this is from June 1st to November 30th but this is a guide only. The average season has 11 names storms, 6 of which become hurricanes and 2 of which achieve major status. It’s important to the trader to follow this as hurricanes tend to hit the Gulf of Mexico – this is an oilrig-rich area. As an example, in 2005 Hurricane Katrina’s devastation saw 20 rigs go missing.

3) Cold Winters, Hot Summers in the US: In cooler winters, central heating means more energy consumption. Similarly, hot summers equal the same result with air-conditioning being used more.

4) Political instability in major oil production zones: Iran, Iraq, Libya, Nigeria, Venezuela and Russia in particular are area with hostile and volatile political climates, which affects oil price.

5) US weekly oil and gas inventory figures: These are published by the Energy Information Administration every Wednesday afternoon.

Trading strategies

Decide if you want to trade a view or use technical analysis. Remember that if you are trading a view, you might be competing with specialists who have inside knowledge. On the other hand, the oil markets do not always respond well to technical analysis, so applying moving averages and support & resistance are simple strategies to fall back on.

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