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⇒ eToro Trading OIL
Oil supply and demand is usually very finely balanced. This generates price instability – and the chance for traders to profit. The slightest movement in either direction opens up the opportunity for a trade. The International Energy Agency’s (IEA) prediction that world demand this year will run at 96.9 million barrels a day and world supply at 97 million barrels, shows how tiny the margins are.
The International Energy Agency (IEA) publishes frequent reports on the oil market. Read IEA news and reports here.
Because of its importance to the world economy, oil is an intensely political commodity. More than 40 per cent of world supply comes from the 13-nation cartel, the Organisation of Petroleum Exporting Countries (OPEC). OPEC seeks to control production in order to support price.
Around another 14 per cent is produced by an informal grouping sympathetic to OPEC. These ‘NOPEC’ countries include Norway, Russia and Mexico.
Oil traders need to study what OPEC says closely. Any sign that production is going to be cut will make a price rise likely. Hints of discontent leading to member countries cheating on their production quotas make weaker prices more likely.
The US accounts for about 20 per cent of all the oil consumed in the world and is now the third-largest oil producer after Saudi Arabia and Russia. Its position has been bolstered by the rapid increase in shale-oil production – fracking. Oil traders will keep a close eye on pronouncements from the American authorities for any hints of policy shifts either for or against increased oil production.
Who should include oil in their portfolio?
- Income investors. Big oil companies generate a steady if unspectacular stream of dividends, being precisely the sort of mature cash-producing businesses sought by those investing for an income rather than for capital growth.
- Day traders, seeking to profit from short-term movements in the oil price. Trading contracts for difference (CFDs) is a good way to do this.
How has the price behaved recently – and why?
Oil-price volatility has been particularly noticeable in recent years. Brent crude, the benchmark price for Atlantic crude, has swung about since the Millennium from a low of just over $16 a barrel to a high of more than $135. Oil prices today trade within a range of $35 to $55.
Why? The answer’s simple. The price of oil is driven by:
- The expected level of demand, which is related directly to the prospects for global economic growth.
- The expected level of supply, including any war-related disruption to supplies from the Middle East and elsewhere and the likelihood of OPEC members curbing their production.
Far less simple is the feedback between oil prices and economic activity. Aggressive OPEC-related price hikes twice pushed the west into recession, in 1973 and 1979 which, in turn, pushed prices down again. Oil producers have since been more careful about the impact of raising prices on their customers.
Oil trading basics
There are 3 ways you can trade oil as a private investor. Sadly, if you like the idea of a few barrels in your shed, actually buying the physical product isn’t one of them! Here are the most common routes into the market.
- Oil exchange-traded funds (ETFs). An ETF is quoted on the stock market and behaves just like any other share, moving up and down. ETFs specialising in this area will have bought oil for the fund, giving you relatively easy access to the oil market.
- Oil futures. These are riskier than oil ETFs as they are, in effect, a bet on where the oil price is going.
- Oil company shares. The energy giants are among the largest commercial operations on the planet and make up a sizeable proportion of the market value of world stock exchanges. Their stock offers straightforward exposure to the oil market – but remember, most oil majors are trying to diversify away from fossil fuels. ETFs and shares are available through eToro..
Considerations about the oil market.
- The oil market is highly liquid – you will never be short of people to trade with. If you’re looking for longer-term exposure to the oil word, then shares in major energy companies are among the bluest of blue chips.
- The oil market is volatile, prone to rumours, political intervention and shifts in forecasts for economic growth. Price swings can be violent and a large chunk of oil production is carried out in places that are prone to instability. Occasionally, the market becomes glutted and the price slumps, as happened in the late 90s.
Is oil trading right for you?
You need only one thing to trade oil – an opinion about where the price is likely to go, possibly gleaned from careful study of oil price charts. The big question is how well-founded is that opinion and whether it will deliver results.
If you’re looking for investment in oil rather than trading it, shares in one of the major energy companies would be a better fit.
Remember that oil is priced in dollars, so if you’re based outside the United States you will need to perform a second calculation into your own currency to see how profitable your involvement in oil proved to be.