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Oil trading in a dynamic market: a look at the key factors at play

Oil is a highly liquid commodity in the financial markets because of its popularity. This makes it easier to buy and sell but it does not make it easier to profit from it. In this write-up, we look at some of the key factors that drive oil prices and how to use them when trading the WTI crude oil which tops the table in global financial markets when it comes to negotiable commodities.

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Oil

Oil is the most popular commodity in the world. This is partly because of its unwavering demand that keeps on growing despite the emergence of alternative sources of energy.

Unlike most commodities where both demand and supply play a crucial role in determining the price per unit of the commodity, oil tends to lean more on the side of supply, which is why most of the price prediction reports base their data on production and supply. But demand plays its role too, just not as significant.

The WTI Crude Oil (CL) also tops the chart in the global financial markets when it comes to tradable commodities including the Futures market and forex trading platforms where it is offered in the form of CFDs (Contracts for Difference).

Investing in the WTI crude oil

This picture show statics from the stock market.
For most ordinary people, trading the WTI crude oil via CFDs is the preferred option. (Source)

Given its undisputed popularity in the commodities market, it makes sense to make the WTI crude oil a primary asset in your investment portfolio. There are a number of ways that a regular person can invest in oil. You can buy stocks of listed oil companies, trade oil in the futures market, or via commodity CFDs on forex brokerage platforms.

In this write-up, we will be looking at the most common and the easiest way to invest in the WTI crude oil along with the key factors that can make or break your chances of success in the oil market. The futures markets are more complicated to the average trader while stocks require more knowledge and research in addition to the factors that affect oil prices.

As such, for most ordinary people, trading the WTI crude oil via CFDs is the preferred option. But this does not make it easier to make money in the market. In fact, due to the dynamic nature of financial markets, it has become more difficult to consistently profit from online trading especially for those that try to take short cuts.

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The factors that matter most when trading the WTI crude oil

To stand a better chance for consistently making profits trading oil, it is important to understand the key factors that drive the WTI crude oil price. Macroeconomic factors include the US API weekly crude oil stocks report, the EIA crude oil stock change report, OPEC oil demand forecast report, and geopolitical situations in the middle east and Latin America. Traders should also keep a close eye on key technical factors like the general market sentiment estimated using trader activity.

Most brokerage platforms that offer commodity trading via CFDs allow those who trade oil to view how the market sentiment is divided between the buyers and sellers on the platform. This can sometimes be used to gauge the general direction of the market but it is not conclusive. It is important to bring all factors into play.

The API and EIA weekly crude oil stocks reports

This picture show an oil tanker.
For instance, when the US lifted sanctions on Iran, oil prices dipped since this was going to increase supply. (Source)

The American Petroleum Institute (API) releases a weekly statistical report for motor gasoline, kerosene jet fuel, distillate (by sulfur content), and residual fuel oil, which represent 85% of the total petroleum industry. An increase in stock balance for crude higher than the consensus estimate often results in a decline in oil prices and vice versa.

This report comes a day before the EIA (Energy Information Administration) which measures the change in the number of barrels in stockpiles of crude oil and its various derivatives. The EIA report tends to affect crude oil prices and currencies tied to the commodity more than the API weekly report. The higher the deviation from the predicted average change, the higher the volatility in the price of the WTI crude oil moments after the report is released.

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OPEC’s monthly oil demand outlook report

The Organization of Petroleum Exporting Countries (OPEC) publishes a monthly report that estimates the future demand for petroleum products, in particular, oil. This year, the body cut the projection for 2019 citing weakening global economic conditions as a major factor.

This momentarily sent oil prices plunging because oil CFDs prices are based on forecasted prices in the futures markets. And if the demand for oil is expected to slow down in the coming months, then oil prices in the futures markets fall. Therefore, it is important to consider the effects of this report along with other factors when analyzing the WTI crude oil price for trading opportunities.

Conclusion

In summary, while these factors top the list of items to consider when trading the WTI crude oil, other things like the general global economic outlook also come into play. But most importantly, geopolitical frictions and government statements can rapidly cause a collapse in oil prices.

For instance, when the US lifted sanctions on Iran, oil prices dipped since this was going to increase supply. And when an oil tanker is attacked in the Persian Gulf by a hostile nation like it has been the case in recent months, oil prices fall because this threatens to halt supply.

All these factors contribute to the dynamic nature of the global financial markets and can increase the volatility of oil prices rapidly.

(Featured photo by Unsplash)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Nicholas is a financial analyst by profession with extensive experience in investment research and stock market analysis. He runs a growth investing blog CAGRValue.com. Some of his market analyses have been featured on leading investment research sites like Seeking Alpha TalkMarkets, Gurufocus, and of course, Born2Invest. As a private individual investor, he focuses on undervalued plays and growth stocks, but his writing is much broader, covering the stock market, commodities, Forex, real estate, personal finance and disruptive technologies.