Trading Oil, whether it is Crude Oil (WTI or US Oil) or Brent Oil (XTI or UK Oil) can be oddly different than trading currencies or any other markets for that factor. Most traders tend to make the mistake of trading Oil just as they would trade any other instrument available with their broker. It goes without saying that unless the trader in question is scalping the markets for a few points or is an intraday trader, for the longer term, the trader needs to take into account various other aspects including fundamental analysis in order to trade oil successfully. In this article, we highlight some of the important factors to bear in mind for traders when you are trading Crude Oil.
The US Dollar and Oil
Crude Oil is priced in US Dollars. It is therefore not surprising that the US Dollar ranks as the first aspect to bear in mind. Because of the US Dollar pricing of Crude Oil, the exchange rate of the US Dollar plays an important role in the day to day pricing of Crude Oil. At the most basic level, a weaker US Dollar tends to see a rise in Crude Oil prices, while a stronger US Dollar results in Crude Oil prices falling. In order to determine the fluctuations in the US Dollar, traders need to have the US Dollar Index chart handy. This ensures that traders can conduct their own technical analysis of the US Dollar Index and then apply their findings to the Crude Oil markets. Of course, don’t just rely on technical analysis of the US Dollar, but also pay attention to the macroeconomics that shapes the price fluctuations in the US Dollar Index.
International and domestic production supplies
To trade oil and to be able to make consistent profits traders need to also pay attention to the supply side of the markets (and the demand as well). As with most markets, supply and demand form the basis in the price fluctuations of the market and the Oil market is no different either. However, when it comes to trading oil, traders need to pay attention to both the domestic and international supply markets. By domestic, we refer to the production levels in the (domestic) American markets. Although the US imports most of its Crude Oil, in recent years the domestic Oil market has managed to gain a significant market share, largely thanks to the Shale Oil discovery. Focusing on various market reports such as the Baker-Hughes Oil rig count alongside the weekly US Crude oil inventories report can help traders to understand the Oil market in a larger perspective.
Geo-Politics and Oil Prices
Despite the US slowly cutting down its Oil imports, the Middle-East plays an important role when it comes to Oil exports. This is because they are a major exporter of Crude Oil to other major world economies as well, such as China, Japan, India and Russia. Therefore any unrest in the Middle-East often see’s Oil prices surge higher at an instant. While it is hard to keep an ear to the ground, traders should always be aware of the risks involved when trading Oil. Keeping a tab on the news especially when you have large open positions trading for the long term can help to manage your risks when you want to trade oil.
To conclude, most traders find it very lucrative to invest in oil, but often end up making bad trading decisions largely due to the fact that traders tend to solely focus on their trading systems or the technical analysis aspects. However, by understanding how the Oil commodity markets work, and more importantly the fundamentals that shapes the day to day prices in Oil, traders would be at a much better advantage to trade Oil more successfully.