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Tips and Strategies for Trading Crude Oil

STRATEGIES AND TIPS FOR TRADING IN CRUDE OIL

  • One of the most liquid commodities in the world, crude oil trades have enormous volumes and visible charts.
  • Oil traders need to be aware of how supply and demand impact oil prices.
  • For trading oil, both fundamental and technical analysis are helpful and provide traders a competitive advantage.
  • To trade crude oil consistently and effectively, traders should adopt a risk-aware approach.

HOW DOES CRUDE OIL TRADING WORK AND WHY TRADE CRUDE OIL?

Being the main source of energy for the global economy, crude oil is a tremendously sought-after commodity. It is a naturally occurring fossil fuel that may be converted into a variety of goods, including wax, lubricants, diesel, gasoline, and other petrochemicals. It is very liquid, in great demand, and traded in large volumes. As a result, trading oil is characterized by narrow spreads, frequent chart patterns, and extreme volatility.

The benchmark for oil in the globe is Brent crude, which makes up over two thirds of all traded oil contracts. The standard oil in America is WTI, which is a little bit lighter and sweeter than Brent.

TRADING HOURS FOR CRUDE OIL

Trading in WTI on CME Globex:

6:00 p.m. to 5:00 p.m. from Sunday through Friday (with an hour break from 5:00 p.m. to 6:00 p.m. each day)

Trading of Brent on ICE:

Saturday and Friday from 5:00 to 7:00 p.m.

BASICS OF CRUDE OIL TRADING: UNDERSTANDING WHAT AFFECTS PRICE MOVEMENTS

Like many commodities, supply and demand are the two main focuses of oil trade. The impact on supply and demand, which has an impact on pricing, will be considered regardless of whether there was an economic report, such as a news event or press release, or tensions in the Middle East.

Supply Elements

  • Outages or maintenance– Because of the potential impact on the supply of oil, outages or maintenance at important refineries throughout the world, like the Port Arthur refinery in Texas and the Forties pipeline in the North Sea, must be closely watched. The Middle East conflict raises questions regarding supplies. For instance, prices had increased by 25% in only a few months before to the start of the Libyan Civil War in 2011.
  • OPEC- Oil prices fluctuate as a result of OPEC (Organization of the Petroleum Exporting Countries) production reductions or expansions. For instance, since the cartel decided to reduce global supply by 1.9% in 2016 (see figure below), the price of oil has increased from $44 per barrel to as high as $80 per barrel.
crude oil
  • Oil Suppliers: In a manner similar to understanding the significance of OPEC, it is equally important to know who the key international oil suppliers are. The EIA website has information on these suppliers.

Demand Elements

  • Seasonality: Warm summers may cause people to be more active and use more oil. People use more oil-based products to heat their homes during cold winters.
  • Oil Consumers: Historically, industrialized nations like the United States and Europe have consumed the most oil. However, Asian nations like China and Japan have recently seen an increase in their oil usage. Therefore, it is crucial for dealers to keep an eye on both the volume of demand from these countries and their economic development. Any slowdown might impact oil prices and cause a decline in demand.
  • Correlation to Global Growth: The graph below illustrates the strong positive relationship between the price of crude oil and world expansion. The world’s two biggest economies, China and the United States, serve as excellent growth indicators. The key stock indices for each country are shown on the graph, and they move in tandem with crude oil prices; as the equity indices decline, so does the price of crude oil, and vice versa.

Positive connection between WTI and Brent Crude and the FTSE China A50 and S&P 500 charts:

crude oil
  • Alternative Energy: Globally, there is a constant drive toward sustainability even while fossil fuels like oil and gas continue to dominate cleaner energy sources. Future crude oil prices will undoubtedly be impacted by this, making it an important component to watch in a crude oil trading strategy.

Numerous people believe that the destabilization of the asset class was caused by the effect of derivatives on the historical prices of crude oil. Simply stated, it is believed that the oil futures prices represented bigger amounts of noise than the actual underlying data at the time. Although some investors disagree with the aforementioned justification, it cannot be denied that massive speculative traders are getting more powerful as a result of the booming derivatives market.

TOP TIPS AND STRATEGIES FOR TRADING OIL

Expert oil traders often stick to a plan. They will be aware of the basic variables influencing oil prices and use a trading strategy that fits their trading preferences. Each trading strategy is unique, and risk management is crucial to consistent trading, along with appropriate leverage utilisation and averting common trading blunders.

A thorough crude oil trading plan can include:

  • Fundamental Analysis
  • Technical Assessment
  • Management of Risk

Once a trader is aware of the basic supply and demand variables that influence the price of oil, he or she may use technical analysis to hunt for market entry opportunities. The trader may then use the appropriate risk management strategies after employing technical analysis to identify a buy or sell signal. Let’s go through an example using the above-described steps:

Fundamental Analysis

A decline in supply resulted from an extension of an oil production cut reached by OPEC and Russia on November 30, 2017. According to the fundamentals of supply and demand, a decline in supply should be followed by an increase in demand and, therefore, in price. To find probable buy signals in the market, a trader would need to include this fundamental research into their approach.

WTI daily graphic showing supply reduction:

crude oil

Technical Analysis

The chart would next be subjected to a technical analysis examination. A trader might hunt for cues to join the market using a range of technical indicators and price patterns. It is not necessary to employ several technical indicators; one that you are familiar with will suffice. Finding the market’s general trend is a simple yet extremely efficient technique to start evaluating any chart. In this illustration, higher highs and higher lows are identified using basic price action, which is indicative of an earlier rising trend. This is consistent with our underlying forecast of further price growth.

WTI daily chart showing earlier upward trend

crude oil

Recognizing potential entry points would be the next phase in the trading plan once the positive trend had been verified. Although there are many tools and methods for finding entry targets, this example makes use of the Commodity Channel Index (CCI) indicator, which enters oversold territory soon after the announcement of the underlying supply reduction. A CCI oversold signal encourages additional price growth and the potential for a long (buy) entry.

CCI indicator on the WTI daily chart:

crude oil

Risk Management

Applying solid risk management to every transaction is the last stage in any trading plan. The 1:2 risk-reward ratio principle, which states that the goal level should be nearly twice as high as the position stop-loss level, is one that DailyFX supports. The trader may attempt to set a take-profit at the most recent high and a stop-loss at the most recent low in order to control risk.

In this case, the stop level has been set at a recent swing low ($49.30), which is around $8 below the entry price ($57.20). In this instance, there is no recent high that would enable a goal projection using simple arithmetic. Considering that the stop distance from entrance is around $8, a 1:2 projection may encounter early resistance near the $73 level.

Daily WTI chart with a risk-to-reward ratio of 1:2

crude oil

ADVANCED OIL TRADING TIPS

When putting up transactions, advanced traders may include more information. Traders may examine the futures curve to predict future demand, CFTC speculative positioning to comprehend the nature of the present market, and options to profit from anticipated swings with high volatility or to protect open holdings.

Futures Curve: Commodity hedges and speculators must consider the futures curve’s form. As a result, when investors examine the curve to determine if the market is in contango or backwardation, they search for two things:

  • Contango: When investors are ready to pay more for a commodity at a future date than the actual anticipated price, the futures price of that commodity is above the expected spot price. Usually, this denotes a bearish structure.
  • Backwardation: This occurs when a commodity’s spot price is higher than its future price. Usually, this denotes a bullish construction.
crude oil

Positioning Speculatively/CFTC

When trading crude oil futures, the Commodity Future Trading Commission Report (CFTC) is crucial. It gives traders information about market dynamics, making it a useful tool for predicting the direction of oil prices. Typically, changes in the managed money net holdings of the CFTC come before changes in oil prices.

Using futures and options for trading

A trader must utilise the right exchange for the oil benchmark they want to trade when purchasing futures and options. Since most exchanges have requirements for who is permitted to trade on them, most futures speculating is done by professionals.

Investing in oil

An investor may get exposure to oil via shares of oil firms or through energy-based exchange traded funds rather than dealing on the individual market (ETFs). The price of oil has a significant impact on the value of oil-related firms and ETFs.

Major Energy/Oil ETFs:

  • Select Sector Energy SPDR (XLE)
  • Energy Vanguard ETF (VDE)
  • Americans for Energy Fund (USO)

Important reports that every Oil Trader should Follow:

For oil traders, weekly updates on the country’s crude oil stockpiles are crucial information, and their publication typically triggers a period of volatility. The data on inventories serves as a crucial gauge of oil demand. For instance, rising weekly stockpiles would indicate that oil demand is declining, while falling inventories would indicate that oil demand is outpacing supply.

  • The American Petroleum Institute (API) publishes a weekly data report that highlights the key petroleum products that make up more than 80% of all refinery output and also includes crude oil stockpiles. Normally, this information is made available on Tuesday at 16:30 ET/21:30 GMT.
  • The Department of Energy/EIA The DoE report offers data on the oil supply and the size of stocks of crude oil and processed goods, similar to the API report. On Wednesday at 10:30 ET/15:30 GMT, this will be disclosed.

SOCIAL MEDIA FOR CRUDE OIL TRADE

Social media has evolved into a platform that is more helpful for exchanging ideas, disseminating knowledge, and getting the latest news. Oil merchants who use the hashtag #OOTT, which stands for the “Organization of Oil Traders” on Twitter, are affected by this. Breaking news and important updates about the oil market are presented here by traders and business professionals.

The oil market are presented here by traders and business professionals.

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