Massive quantities of commodities enter the global markets every year. These are physical marketable substances or items that satisfy various human needs. The history of commodity trading traces back to early 17th century when rice futures were traded in Japan.
Today, commodities are mostly traded as forwards or futures contracts, where fluctuations in their value are hedged. The intrinsic value of these commodities does not depend on currencies. Often they act as safe havens for investors, in times of economic crisis.
The Most Traded Commodity: Crude Oil
The commodity with the highest trade volume globally is crude oil. The market value of crude oil in 2016 stood at $549 billion, comprising 2% of total global exports. Refined petroleum had a total market value stood at $825 billion, accounting for 3% of total global exports.
Often termed as “black gold,” crude oil is a non-renewable source of energy, making it one of the most expensive and volatile commodities to trade. It touches almost every sector of the global economy, as a source of gasoline, diesel, and other petrochemicals, used in the production of textiles, fertilizers, plastics, steel, and other consumer durables.
Types of Crude Oil Traded in the Market
Two major types of oil are in use to benchmark global oil prices:
1. Brent Crude
Drilled from the oil fields in the North Sea’s Brent, Oseberg, the Forties and Ekosfisk fields, which lie off the shore of Norway and the UK, this type of oil is low in sulfur content and density, which makes it easier to refine. The strategic location of the oil fields makes its transportation easier and cost-effective. Various supply and demand factors affect its prices, with prices escalating during economic growth and vice versa. The Organization of Petroleum Exporting Countries (OPEC) presides over the dynamics of global oil trading, including that of Brent Crude.
2. West Texas Intermediate (WTI)
WTI extraction is in various parts of the US, including Texas, Louisiana, and North Dakota. After it is sent to Oklahoma for price settlement. Technically, the oil has even lower sulfur content and density than its Brent counterpart. Its price greatly depends on the US demand and supply balance. The geographical location of Cushing, Oklahoma, makes it difficult for this commodity to be readily transported across the world. Hence, the prices of Brent and WTI vary to a large extent. Recently, the new “seaway pipeline” reversed, which makes it easier to transport it to the Gulf of Mexico.
Key Factors to Consider While Trading Crude Oil
- US Economy: The US is by far the largest importer of crude oil, and at the same time, the largest exporter of refined petroleum. While it imports one grade of crude oil at a lower price, it exports a higher grade of the oil at a premium. Hence, US economic indicators play a crucial role in oil trading.
- Middle-East Economy: Although crude output has declined in Middle Eastern nations over the last few years, it is nevertheless essential to track the supply figures. It still accounts for 34% of global oil production and 45% of all crude oil exports.
- Wars and Political Turmoil: Geopolitical events globally can impact a commodity that is key to almost every industry.
In 2017, the average OPEC crude oil price was $52.51 per barrel, while in 2018, the average price has been $71.20. In 2019, the global trade war and Brexit events supposedly can impact the supply and demand ratio for crude oil.